From the 17th century onwards Scotland was at the vanguard of the evolution of banking in Europe and was a leading innovator in the issuing of its own banknotes a unique right that it has fought to retain for 300 years.

Not worth a bawbee

The Romans introduced the earliest coins in Scotland and the first Scottish coins appeared during the reign of David I, around the 12th century. These silver pennies, which were minted at Berwick, resembled English 'sterling' coins of the day and had the King's name written as "Tavit" on one side. Later in David's reign more mints sprang up round the country and by 1250 Scotland had around 16 mints, in places such as Perth, Roxburgh and Edinburgh.

The first gold coin, called a 'noble,' appeared in the 14th century and had a lion rampant on one side. In 1539 King James V issued the first Scottish coin to bear a date. This gold ducat was referred to as a 'bonnet' as there was an image of the king wearing a flat cap on it.

Around the same time a coin equal in value to a halfpenny sterling was issued, called a 'bawbee.' The name was said to derive from "Sillebawbe", a part of the country where Archibald Orrock, a 16th century mint-master, was the laird. The term was still being used in some Lowland Scots in the 20th century and featured in a widely sung lullaby called .

While it was not the smallest value coin in circulation its lowly status meant that it was and still is used to describe something of little value as "not worth a bawbee".

But poor countries like Scotland found it increasingly difficult to keep a good supply of coins as they were made of precious metals. Scots coinage was also of uncertain value compared with the English, Dutch, Flemish or French coin, which were all in circulation in Scotland at the time.

Subsequently, merchants became staunch supporters of an alternative way of settling accounts when they saw trade was being severely hampered by the lack of an adequate currency and necessity leads to inventiveness.

Paper promises

In most countries it is only the government, through its central bank, that is permitted to issue currency, but in Scotland three banks are still allowed to issue banknotes the Bank of Scotland (now HBOS), the Royal Bank of Scotland (RBS) and the Clydesdale Bank (part of NAG).

The Bank of Scotland was the first to issue notes when it was founded in 1695. It immediately began by issuing notes and granting loans for the only people who could use banks at the time: the extremely wealthy. The notes were a much more convenient means of payment it was far easier to carry a single banknote than a pocketful of coins! They were also more reliable since their value was clearly stated and, moreover, guaranteed by the bank.

Acceptance spread rapidly and the circulation of notes increased. As this spread from the merchants to the general public, Scotland became one of the first countries in the world to use paper currency by choice. The Royal Bank of Scotland followed suit when it was established in 1727.

At first the banknote system worked well, with fierce competition between the "Old Bank" and the "new", much of which centred on note-issue indeed it was not until 1751 that the Bank of Scotland and the Royal Bank agreed to accept each other's notes but the banks had no branches so the notes did not circulate much beyond Edinburgh. Later a host of provincial banks sprang up in Glasgow, Perth, Dundee and Aberdeen.

The first notes were bound in books, rather like a modern chequebook, but without perforations. The bank cashier or customer would cut them out with a knife or scissors some impatient customers would simply tear them out leaving ragged edges. Each 20 shilling note 1 was in circulation for around nine months, a similar life expectancy to today's 1 notes.

When banknotes became old and worn they were burned, but this 260-year tradition ended in August 1992, when the then chairman of the Royal Bank, Lord Younger, committed the last bundle to the flames. From then on the bank started to dispose of old notes in a more environmentally friendly way by "granulating" them and then burying them at a site west of Edinburgh.

At the first note burning in 1728, the Royal Bank incinerated 383. By 1992 sums in the thrice-weekly ritual, which had to be witnessed by executives who recorded the destruction of the notes, had reached 2 million. By the way, you can go to see 1 million in brand new 20 notes by visiting The Museum on the Mound in Edinburgh the climb up is worth it! But don't contemplate a heist the notes are all marked.

An interesting fact that still confuses people today is that Scottish banknotes are not actually legal tender which explains why you may find a London taxi driver or a shopkeeper in Norwich turning them over and muttering something about "foreign money."

Scottish banknotes are technically promissory notes like a cheque made out to the bearer, promising to pay them. In England and Wales people can legally refuse to take them but, although they're not obliged to do so, most shops and other establishments there accept them.

Foiling forgers

Early notes were very simple in design and were printed in black ink on white paper, so were relatively easy to copy.

Banks were forced to use modern advances in printing to create more sophisticated notes, and highly skilled engravers were employed to produce elaborate designs to stymie the forgers.

In September 1777 the Royal Bank pioneered the use of colour in banknotes in Europe using a blue rectangle displaying the words "on Guinea" and the King's head shown in red. However, colour did not come into widespread use until nearly a century later.

But despite these advances, during wars with Revolutionary and Napoleonic France, enterprising French prisoners incarcerated in Edinburgh and Perthshire jails spent their time forging Scottish banknotes, using soup-bones and home-made dies to create fraudsters' toolkits and produce fake notes.

The scheming Frenchmen used local men to get the money out of the prison and into circulation. Hundreds of notes were forged after 1806, leading to execution of many forgers.

A further security measure was introduced in 1826 when the Royal Bank issued the first notes printed on both sides. Other measures adopted to decrease the risk of forgery included the use of watermarked paper, an embossed bank seal and the signature of the bank's cashier.

Due in part to these pioneering advances in security, the public gradually became more confident about using banknotes and this enabled the banks to expand their business by issuing more loans. Soon the banks were also taking deposits from customers on which they paid interest.

As the 19th century drew to a close, Scotland had built a banking system based on note issuing, branches, deposit taking and loans which was far ahead of other countries systems.

Fighting for an historic right

The greatest threat to the issue of Scottish banknotes arose in 1826. In February of that year an Act of Parliament was passed by the government banning the circulation of notes under 5 in England a ban they also planned to extend to Scotland. Such a ban would have meant the disappearance of the much loved Scottish 1 note, which was the one with which most people were familiar.

This aroused widespread anger in Scotland and many people campaigned for the historic right of Scottish banks to continue issuing the notes. The novelist Sir Walter Scott wrote a series of letters that helped defeat the plan and the right to issue banknotes of 1 was allowed to continue. To this day Scott's portrait appears on Bank of Scotland notes in recognition of his defence of the Scottish banknote.

The Bank of Scotland stopped issuing the 1 note in 1989 and the Bank of England ceased producing them years ago. The Royal Bank of Scotland is the only bank still printing 1 notes and has no plans to stop printing them but due to their relative scarcity they have become collectors' items. In 2006 a US-based banknote enthusiast snapped up 10 crisp green Royal Bank of Scotland 1 notes for 47.

Up for auction

Early Scottish banknotes are even more collectable, not least because of their attractive design. Scotland's first bankers would be amazed at how much these early notes are worth today. A rare 1 note produced by the Glasgow Joint Stock Banking Company in November 1840, featuring engravings of Neptune and a shipping scene of the Clyde, fetched thousands of pounds at auction in 2005.

Even modern banknotes are sought after. In 2006, the Royal Bank issued 5 notes featuring an image of the American golfing legend Jack Nicklaus, to commemorate his British Open swansong appearance at St Andrews. Nicklaus was only the third person, apart from the Queen and the late Queen Mother, to appear on a Scottish banknote during their own lifetime. The notes were recently being auctioned on eBay for more than ten times their face value despite two million of them being in circulation.

Scottish banknotes have featured many famous Scots, from Robert Louis Stevenson, Sir Walter Scott and Alexander Graham Bell to Robert the Bruce, Robert Burns, West African missionary Mary Slessor, architect Alexander 'Greek' Thomson and researcher and inventor Lord Kelvin. But it wasn't until 2007 that the first Scotsman featured on money issued by the Bank of England. Adam Smith, the founder of modern economics and the father of free trade, was chosen to replace composer Sir Edward Elgar as the face on the 20 note.

Scottish money matters

But Scottish banknotes are much more than a quirk of history.

The note issues were an integral part of a highly successful Scottish banking system that evolved in the 18th century and which became the model for banks in the UK and in other parts of the world. It enabled a very poor country to catch up with its richer neighbour during the industrial revolution.

Scotland has come a long way since then with both the Royal Bank of Scotland and HBOS among the top ten banks in the world, and Edinburgh behind only London as the UK's financial capital. Glasgow's financial centre has grown rapidly too, and our twin cities constitute a major European and World financial centre.

The growing strengths of the City of London have been well documented but in the early years of the 21st century Scotland too has performed strongly and grown into an international financial centre to be reckoned with.

Over the past half-dozen years, financial services have become one of the main powerhouses of Scotland's economy and its fastest growing business sector.

Like London, Scotland has benefited hugely from the welcome it's given to foreign capital and talent, and a willingness to run with market forces. The financial communities of Edinburgh and Glasgow, while benefiting from being part of the UK financial services market, have also gained enormously from their healthy distance from London.

Close enough to be able to share in the City's successes but far enough away to be able to swim against the tide and spot opportunities that may be missed by the people down in the Square Mile.

And to think it all started a few hundred years ago with the innovation of a simple piece of paper we use every day the humble banknote. Scottish banknotes have formed the major part of the money-circulating medium of Scotland for 300 years and have become an important part of Scotland's national identity, jealously guarded by the banks and passionately backed by the people.

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