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The Bank of Scotland was established by an act of the Scottish Parliament on 17 July 1695, opening for business in February 1696. The founding act permitted the banks' directors to raise a nominal capital of £1,200,000 Scots (£100,000 Sterling), granted the bank a monopoly on banking in Scotland for 21 years, gave the Proprietors (shareholders) limited liability, and the final clause (repealed only in 1920) made all foreign-born Proprietors naturalised Scotsmen "to all Intents and Purposes whatsoever".
The Bank of Scotland was the first bank in Europe to successfully issue paper currency redeemable for cash on demand (which was an extremely useful facility given the poor state of the Scottish coinage at the end of the seventeenth century). The right to issue banknotes has been maintained to the present day. Following the Union of Scotland and England in 1707, the bank supervised the reminting of the old Scottish coinage into Sterling.
The bank took the lead in establishing the security and stability of the entire Scottish banking system, which became more important after the collapse of the Ayr Bank in 1772. The Western Bank collapsed in 1857, and the Bank of Scotland stepped in with the other Scottish banks to ensure that all Western Bank's notes were paid.
In 1826 there was outrage in Scotland at the attempt of the British Parliament to prevent the production of banknotes of less than five pounds face value. Sir Walter Scott wrote a series of letters to the Edinburgh Weekly Journal under the pseudonym "Malachi Malagrowther" which provoked such a response that the government was forced to relent and allow the Scottish banks to continue printing £1 notes. For this reason Sir Walter still appears on all Bank of Scotland notes.
By the 1990s the Bank of Scotland was the result of a large number of amalgamations, the most important being with the Union Bank of Scotland in 1955, and the British Linen Bank in 1971. In 2001 the Bank agreed a merger with the Halifax Group to produce one of Britain's largest clearing banks.