II. OF BANKS

II. OF BANKS

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CHAP. I. Of the various Kinds of Credit.

We have already pointed out the nature of credit, which is confidence; and we have deduced the principles which influence the rate of interest, the essential requisite for its support.

We come now to treat of domestic circulation; where we are to deduce the principles of banking. This is the great engine calculated for carrying it on.

That I may, with order, investigate the many combinations we shall here meet with, I must point out wherein banks differ from one another in point of policy, as well as in the principle upon which their credit is built.

If we consider them relative to their policy, I divide them into banks of circulation, and banks of deposit. This every one understands.

If according to their principle, they are established either on private, or mercantile, or public credit.

This last division I must attend to in the distribution of what is to follow; and therefore it is proper to set out by explaining what I understand by the terms I have here introduced.

1_mo_, Private credit. This is established upon a security, real or personal, of value sufficient to make good the obligation of repayment both of capital and interest. This is the most solid of all.

2_do_, Mercantile credit. This is established upon the confidence the lender has, that the borrower, from his integrity and knowledge in trade, may be able to replace the capital advanced, and the interest due during the advance, in terms of the agreement. This is the most precarious of all.

3_tio_, Public credit. This is established upon the confidence reposed in a state, or body politic, who borrow money upon condition that the capital shall not be demandable; but that a certain proportional part of the sum shall be annually paid, either in lieu of interest, or in extinction of part of the capital; for the security of which, a permanent annual fund is appropriated, with a liberty, however, to the state to liberate itself at pleasure, upon repaying the whole; when nothing to the contrary is stipulated.

The solidity of this species of credit depends upon circumstances.

The difference between the three kinds of credit lies more in the object of the confidence, and the nature of the security, than in the condition of the borrower. Either a private man, a merchant, or a state, may pledge, for the security of a loan, a real or a moveable security, with an obligation to refund the capital. In this case, the obligation stands upon the solid basis of private credit.

Either a private man, a merchant, or a state, may strike out projects which carry a favourable appearance of success, and thereupon borrow considerable sums of money, repayable with interest. In this case, the obligation stands upon a mercantile credit.

Either a private man, a merchant, or a state, may pledge (for the security of money borrowed) a perpetual annual income, the fund of which is not their property, without any obligation to refund the capital: such obligations stand upon the principles of public credit.

I allow there is a great resemblance between the three species of credit here enumerated: there are however some characteristic differences between them.

1_mo_, In the difficulty of establishing and supporting them.

Private credit is inseparable, in some degree, from human society. We find it subsisting in all ages: the security is palpable, and the principles on which it is built are simple and easy to be comprehended. Public credit is but a late invention: it is the infant of commerce, and of extensive circulation. It has supplied the place of the treasures of old, which were constant and ready resources to statesmen in cases of public distress: the security is not palpable, nor readily understood, by the multitude; as it rests upon the liability of certain fundamental maxims of government. Mercantile credit is still more difficult to establish; because the security is the most precarious of any: it depends upon opinion and speculation, more than upon a fund provided for repayment of either capital or interest.

2_do_, They differ in the nature of the security and object of confidence.

Private credit has a determinate object of confidence, viz. the real existence of value in the hands of the debtor, sufficient to satisfy both capital and interest. Public credit has the visible security of a fund appropriated for the perpetual payment of the interest. Mercantile credit depends wholly upon the integrity, capacity, and good fortune of the debtor.

3_tio_, The third difference is with regard to the ease of transfer.

Public debts stand generally on the same bottom. No part of the same fund is better than another: the price of them is publicly known, and the securities are laid in the most convenient way for transfer, that is, circulation, without consent of the debtor. This is far from being the case in private securities. Nor is it the case in the mercantile, except in bills payable to order, in which case alone, the creditor can effectually transfer without the consent of the debtor.

4_to_, The fourth difference is discovered in the stability of the confidence.

Nothing can shake private credit, but an appearance of insolvency in the very debtor. But the bankruptcy of one considerable merchant, will give a very great shock to mercantile credit over all Europe: and nothing will hurt public credit, so long as the stipulated interest continues regularly to be paid, and so long as the funds appropriated for that payment remain entire.

From what has been said, I hope the three species of credit have been sufficiently explained; and from what is to follow, we shall feel the utility of this distribution.

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CHAP. II. Of private Credit.

Private credit is either real, personal, or mixed.

Real security or credit, every body understands. It is the object of law, not of politics, to give an enumeration of its different branches. By this term, we understand no more than the pledging an immoveable subject for the payment of a debt. As by a personal security we understand the engagement of the debtor’s whole effects for the relief of his creditors. The mixed, I have found it necessary to superadd, in order to explain with more facility, the security of one species of banks. The notes issued by banks upon private credit, stand upon a mixed security: that is, both real and personal. Personal, so far as they affect the banker, and the banking stock pledged for the security of the paper: and in the second place, upon the securities, real and personal, granted to the banker for the notes he lends, which afterwards enter into circulation.

The ruling principles in private credit, and the basis on which it rests, is the facility of converting, into money, the effects of the debtor; because the capital and interest are constantly supposed to be demandable. The proper way, therefore, to support this sort of credit to the utmost, is to contrive a ready method of appretiating every subject affectable by debts; and secondly, of melting it down into symbolical or paper money.

In former times, when circulation was confined, the scheme of melting down the property of debtors, for the payment of creditors, was impracticable; and accordingly we see that capitals secured on land property were not demandable. This formed another species of credit, different from any we have mentioned; which only differed from public credit in this, that the solid property producing the income, was really in the hands of the debtor. This subdivision we have omitted, as its basis rests solely upon the regular payment of the interest. Of this nature are the contracts of constitution in France, and the old infeftments of annual rent in Scotland. There are few nations, I believe, in Europe, where a vestige, at least, of this kind of security does not remain.

In order, then, to carry private credit to its greatest extent, all entails upon lands should be dissolved; all obligations should be regularly recorded in public registers; the value of all lands should be ascertained, the moment any security is granted upon them; and the statesman should interpose between parties, to accelerate the liquidation of all debts, in the shortest time, and at the least expence possible.

Although this method of proceeding be the most effectual to secure, and to extend private credit, yet it is not, at all times, expedient to have recourse to it; as we have abundantly explained in the 27th chapter of the second book; and therefore I shall not here interrupt my subject with a needless repetition.

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CHAP. III. Of Banks.

In deducing the principles of banks, I shall do the best I can to go through the subject systematically.

I have divided credit into three branches, private, mercantile, and public. This distribution will be of use on many occasions, and shall be followed as far as it will go, consistently with perspicuity: but as I have often observed of subjects of a complex nature, they cannot be brought under the influence of a few general principles, without running into the modern vice of forming systems, by wire-drawing many relations in order to make them answer.

The great operations of domestic circulation are better discovered by an examination of the principles upon which we find banking established, than by any other method I can contrive. It has been by inquiry into the nature of those banks which are the most remarkable in Europe, that I have gathered the little knowledge I have of the theory of circulation. This induces me to think that the best way of communicating my thoughts on that subject, is to lay down the result of my inquiries relative to the very object of them.

After comparing the operations of different banks in promoting circulation, I find I can divide them, as to their policy, into two general classes, viz. those which issue notes payable in coin to bearer; and those which only transfer the credit written down in their books from one person to another.

Those which issue notes, I call banks of circulation; those which transfer their credit, I call banks of deposit.

Both indeed may be called banks of circulation, because by their means circulation is facilitated; but as different terms serve to distinguish ideas different in themselves, those I here employ, will answer the purpose as well as any others, when once they are defined; and circulation undoubtedly reaps far greater advantages from banks which issue notes transferable every where, than from banks which only transfer their credit on the very spot where the books are kept.

I shall, according to this distribution, first explain the principles upon which the banks of circulation are constituted and conducted, before I treat of the other.

This will lead me to avail myself of the division I have made of credit, into private, mercantile, and public: because, according to the purposes for which a bank is established, the ground of confidence, that is, the credit of the bank, is settled upon one or other of them.

In countries where trade and industry are in their infancy, credit must be little known; and they who have solid property, find the greatest difficulty in turning it into money, without which industry cannot be carried on, as we have abundantly explained in the 26th chapter of the second book; and consequently the whole plan of improvement is disappointed.

Under such circumstances, it is proper to establish a bank upon the principles of private credit. This bank must issue notes upon land and other securities, and the profits of it must arise from the permanent interest drawn for the money lent.

Of this nature are the banks of Scotland. To them the improvement of that country is entirely owing; and until they are generally established in other countries of Europe, where trade and industry are little known, it will be very difficult to set those great engines to work.

Although I have represented this species of banks, which I shall call banks of circulation upon mortgage, as peculiarly well adapted to countries where industry and trade are in their infancy, their usefulness to all nations, who have upon an average a favourable balance upon their trade, will sufficiently appear upon an examination of the principles upon which they are established.

It is for this reason, that I have applied myself to reduce to principles all the operations of the Scotch banks, while they were in the greatest distress imaginable, from the heavy balance the country owed during the last years of the late war, and for some time after the peace in 1763. By this I flatter myself to do a particular service to Scotland, as well as to suggest hints which may prove useful, not only to England, but to all commercial countries, who, by imitating this establishment, will reap advantages of which they are at present deprived.

For these reasons, I hope the detail I shall enter into with regard to Scotland, will not appear tedious, both from the variety of curious combinations it will contain, as also from the lights it will cast upon the whole doctrine of circulation, which is the present object of our attention.

In countries where trade is established, industry flourishing, credit extensive, circulation copious and rapid, as in England, banks upon mortgage, however useful they may prove for other purposes, would not answer the demands of the trade of London, and the service of government, so well as the bank of England.

The ruling principle of that bank, and the ground of their confidence, is mercantile credit. The bank of England does not lend upon mortgage, nor personal security: their profits arise from discounting bills; loans to government, upon the faith of taxes, to be paid within the year and upon the credit cash of those who deal with them.

A bank such as that of England, cannot therefore be established, except in a great wealthy mercantile city, where the accumulation of the smallest profits amount, at the end of the year, to very considerable sums.

In France, under the regency of the Duke of Orleans, there was a bank erected upon the principles of public credit. The ground of confidence there, and the only security for all the paper they issued, were the funds appropriated for the payment of the interest of the public debts.

It is for the sake of order and method, that I propose to explain the principles of banking, according to this distribution. I must however confess, that although I represent each of them as having a cause of confidence peculiar to itself, to wit, either private, mercantile, or public credit; yet we shall find a mixture of all the three species of credit entring into the combination of every one of them.

Banking, in the age we live, is that branch of credit which best deserves the attention of a statesman. Upon the right establishment of banks, depends the prosperity of trade, and the equable course of circulation. By them [6]solid property may be melted down. By the means of banks, money may be constantly kept at a due proportion to alienation. If alienation increases, more property may be melted down. If it diminishes, the quantity of money stagnating, will be absorbed by the bank, and part of the property formerly melted down in the securities granted to them, will be, as it were, consolidated anew. These must pay for the country the balance of their trade with foreign nations. These keep the mints at work; and it is by their means, principally, that private, mercantile, and public credit, is supported. I can point out the utility of banks in no way so striking, as to recall to mind the surprizing effects of Mr. Law’s bank, established in France, at a time when there was neither money or credit in the kingdom. The superior genius of that man produced, in two years time, the most surprizing effects imaginable; he revived industry; he established confidence; and shewed to the world, that while the landed property of a nation is in the hands of the inhabitants; and while the lower classes are willing to be industrious, money never can be wanting. I must now proceed in order, towards the investigation of the principles which influence this intricate and complicated branch of my subject.

Footnote 6:

Solid property, here, is not taken in the strictest acceptation. In countries of commerce, where banks are generally established, every denomination of good personal security, may be considered as solid property. Those who have personal estates may obtain credit from banks as well as landed men; because these personal estates are secured either on lands, or in the funds, or in effects which contain as real a value as lands, and these being affected by the securities which the proprietors grant to the bank, may with as much propriety be said to be melted down, as if they consisted in lands. In subjects of this nature, it is necessary to extend our combinations, in proportion to the circumstances under which we reason.

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CHAP. IV. Of Banks of Circulation upon Mortgage or private Credit.

Banks of circulation upon mortgage or private credit, are those which issue notes upon private security, payable to bearer on demand, in the current coin of the nation. They are constituted in the following manner.

A number of men of property join together in a contract of banking, either ratified or not by public authority, according to circumstances. For this purpose, they form a stock which may consist indifferently of any species of property. This fund is engaged to all the creditors of the company, as a security for the notes they propose to issue. So soon as confidence is established with the public, they grant credits, or cash accompts, upon good security; concerning which they make the proper regulations. In proportion to the notes issued in consequence of those credits, they provide a sum of coin, such as they judge to be sufficient to answer such notes as shall return upon them for payment. Nothing but experience can enable them to determine the proportion between the coin to be kept in their coffers, and the paper in circulation. This proportion even varies according to circumstances, as we shall afterwards observe.

The profits of the bank proceed from the interest paid upon all the securities which have been granted to it, in consequence of credits given, and which remain with it unretired.

Out of which must be deducted, first, the charge of management; secondly, the loss of interest for all the coin they preserve in their coffers, as well as the expence they are put to in providing it; and thirdly, the expence of transacting and paying all balances due to other nations.

In proportion, therefore, as the interest upon the bank securities exceeds the loss of interest on the coin in the bank, the expence of management, and of providing funds abroad to pay balances, in the same proportion is their profit; which they may either divide, accumulate, or employ, as they think fit.

Let it be observed, that I do not consider the original bank stock, or the interest arising from that, as any part of the profits of the bank. So far as regards the bank, it is their original property; and so far as regards the public, it serves for a collateral security to it, for the notes issued. It becomes a pledge, as it were, for the faithful discharge of the trust reposed in the bank: without such a pledge, the public could have no security to indemnify it, in case the bank should issue notes for no permanent value received. This would be the case, if they thought fit to issue their paper either in payment of their own private debts, for articles of present consumption; or in precarious trade.

When paper is issued for no value received, the security of such paper stands alone upon the original capital of the bank, whereas when it is issued for value received, that value is the security on which it immediately stands, and the bank stock is, properly speaking, only subsidiary.

I have dwelt the longer upon this circumstance, because many, who are unacquainted with the nature of banks, have a difficulty to comprehend how they should ever be at a loss for money, as they have a mint of their own, which requires nothing but paper and ink to create millions. But if they consider the principles of banking, they will find that every note issued for value consumed, in place of value received and preserved, is neither more or less, than a partial spending either of their capital, or profits on the bank. Is not this the effect of the expence of their management? Is not this expence paid in their notes? But did ever any body imagine that this expence did not diminish the profits of banking? Consequently, such expence may exhaust these profits, if carried far enough; and if carried still farther, will diminish the capital of the banking stock.

As a farther illustration of this principle, let me suppose, an honest man, intelligent, and capable to undertake a bank. I say that such a person, without one shilling of stock, may carry on a bank of domestic circulation, to as good purpose as if he had a million; and his paper will be every bit as good as that of the bank of England. Every note he issues, is secured on good private security; that security carries interest to him, and stands good for the notes he has issued. Suppose then that after having issued for a million sterling, all the notes should return upon him in one day. Is it not plain, that they will find, with the honest banker, the original securities, taken by him at the time he issued them; and is it not true, that he will have, belonging to himself, the interest received upon these securities, while his notes were in circulation, except so far as this interest has been spent in carrying on the business of his bank? Large bank stocks, therefore, serve only to establish their credit; to secure the confidence of the public, who cannot see into their administration; but who willingly believe, that men who have considerable property pledged in security of their good faith, will not probably deceive them.

This stock is the more necessary, from the obligation of paying in the metals. Coin may be wanting, upon some occasions, to men of the greatest landed property. Is that any reason to suspect their credit? Just so of banks. The bank of England may be possessed of twenty millions sterling of good effects, to wit, their capital; and the securities for all the notes they have issued; and yet that bank might be obliged to stop payment, upon a sudden demand of a few millions of coin.

Runs upon a bank well established, betray great want of confidence in the public; and this want of confidence proceeds from the ignorance the greatest part of men are in, with regard to the state of their affairs, and of the principles upon which their trade is carried on.

From what has been said, we may conclude, that the solidity of a bank which lends upon private security, does not so much depend upon the extent of their original capital, as upon the regulations they observe in granting credit. In this the public is nearly interested; because the bank securities are really taken for the public, who are creditors upon it in virtue of the notes which circulate through their hands.

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CHAP. V. _Such Banks ought to issue their Notes on private, not mercantile Credit._

Let me, therefore, reason upon the example of two bankers; one issues his notes upon the best real or personal security; another gives credit to merchants and manufacturers, upon the principles of mercantile credit, which we have explained above; the notes of the one and the other enter into circulation, and the question comes to be, which are the best? If we judge by the regularity of the payment of notes on presentation, perhaps the one are as readily paid as the other. If we judge by the stock of the two bankers, perhaps they may be equal, both in value and solidity; but it is not upon either of these circumstances that the question depends. The notes in circulation may far exceed the amount of the largest bank stock; and therefore, it is not on the original stock; but on the securities taken at issuing the notes, that the solidity of the two currencies is to be estimated. Those secured on private credit, are as solid as lands and personal estates; they stand upon the principles of private credit. Those secured on the obligations of merchants and manufacturers, depending upon the success of their trade, are good or bad in proportion. Every bankruptcy of one of their debtors, involves the bank, and carries off either a part of their profits, or of their stock. Which way, therefore, can the public judge of the affairs of bankers, except by attending to the nature of the securities upon which they give credit[7].

Footnote 7:

It must be observed, that in this example, the banker who issues his notes upon mercantile security, is supposed to grant a permanent loan to the merchant or manufacturer, as he would do to those who pledge a personal security. This is totally repugnant to the principle of banks secured on mercantile credit. Such banks never grant loans for indefinite duration, upon any security whatsoever. They will not even discount a bill of exchange, when it has above two months to run.

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CHAP. VI. Use of subaltern Bankers and Exchangers.

Here it may be urged, that the great use of banks is to multiply circulation, and to furnish the industrious with the means of carrying on their traffic: that if banks insist upon the most solid sureties before they give credit, the great utility of them must cease; because merchants and manufacturers are never in a situation to obtain credit upon such terms.

This argument only proves, that banks are not, alone, sufficient for carrying on every branch of circulation. A truth which no body will contravert. But as they are of use in carrying on the great branches of circulation, it is proper to prevent them from engaging in schemes which may destroy their credit altogether.

I have observed above, that this method of issuing notes upon private security, was peculiarly well adapted to countries like Scotland, where trade and industry are in their infancy.

Merchants and manufacturers there, have constant occasion for money or credit; and at the same time, they cannot be supposed to have either real or personal estates to pledge, in order to obtain a loan directly from the banks, who ought to lend upon no other security.

To remove that difficulty, we find a set of merchants, men of substance, who obtain from the banks very extensive credits upon the joint real and personal security of themselves and friends. With this assistance from the bank, and with money borrowed from private people, repayable on demand, something below the common rate of interest, they support the trade of Scotland, by giving credit to the merchants and manufacturers.

To this set of men, therefore, are banks of circulation upon mortgage to leave that particular branch of business. It is their duty, it is the interest of the country, and no less that of banks, that they be supported in so useful a trade; a trade which animates all the commerce and manufactures of Scotland, and which consequently promotes the circulation of those very notes upon which the profits of the banks do arise.

These merchants are settled in all the most considerable towns: they are well acquainted with the stock, capacity, industry, and integrity of all the dealers in their district: they are many; and by this are able to go through all the detail which their business requires; and their profits, as we shall see presently, are greater than those of banks, who lend at a stated interest.

The common denomination by which they are called in Scotland, is that of bankers; but to avoid their being confounded with bankers in England (whose business is very different) we shall, while we are treating of the doctrine of banks, call them by the name of exchangers, since their trade is principally carried on by bills of exchange.

As often as these exchangers give credit to dealers in any way, they constantly state a commission of ½ per cent. or more, according to circumstances, over and above the interest of their advance; profits which greatly surpass those of any bank. One thousand pounds credit given by a bank, may not produce ten pounds in a year for interest: if given by a banker, to a merchant, who draws it out, and replaces it forty times in a year, there will arise upon it a commission of 20 per cent. or 200_l._

This set of men are exposed to risks and losses, which they bear without complaint, because of their great profits; but it implies a detail, which no bank can descend to.

These exchangers give way, from time to time; and no essential hurt is thereby occasioned to national credit. The loss falls upon those who lend to them, or trust them with their money, upon precarious security; and upon merchants, who lay their account with such risks. In a word, they are a kind of insurers, and draw premiums in proportion to their risks.

To this set of men, therefore, it should be left to give credit to merchants, as the credit they give is purely mercantile; and to banks alone, who give credit on good private security, it should be left to conduct the great national circulation, which ought to stand upon the solid principles of private credit.

From this example we may discover the justness of the distinction I have made between private and mercantile credit: had I not found it necessary, I would not have introduced it.

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CHAP. VII. Concerning the Obligation to pay in Coin, and the Consequences thereof.

In all banks of circulation upon mortgage, the obligation in the note is to pay in coin, upon demand: and in the famous book of Mr. Law, there was a very necessary clause added; to wit, that the coin was to be of the same weight, fineness, and denomination, as at the date of the note. This was done, in order to prevent the inconveniencies which might result to either party, by an arbitrary raising or sinking the denominations of the coin; a practice then very familiar in France.

This obligation to pay in coin, owes its origin to the low state of credit in Europe at the time when banks first began to be introduced; and it is not likely that any other expedient will soon be fallen upon to remove the inconveniences which result from it in domestic circulation, as long as the generality of people consider all money, except coin, to be false and fictitious.

I have already thrown out abundance of hints, from which it may be gathered, that coin is not absolutely necessary for carrying on domestic circulation, and more will be said on that subject, as we go along. But I am here to examine the nature and consequences of this obligation contracted by banks, to discharge their notes in the current coin of the country.

In the first place, it is plain, that no coin is ever (except in very particular cases) carried to a bank, in order to procure notes. The greatest part of notes issue from the banks, of which we are treating, either in consequence of a loan, or of a credit given by the bank, to such as can give security for them. The loan is made in their own notes; which are quickly thrown back into circulation by the borrower; who borrowed, because he had occasion to pay them away. In like manner, when a credit is given, the bank pays (in her notes) the orders she receives from the person who has the credit: in this manner are notes commonly issued from a bank.

Coin, again, comes to a bank, in the common course of circulation, by payments made to it, either for the interest upon their loans, or when merchants and landed men throw the payments made to them into the bank, towards filling up their credits; and by way of a safe deposit for their money. These payments are made to the bank in the ordinary circulation of the country. When there is a considerable proportion of coin in circulation, then the bank receives much coin; and when there is little, they receive little. Whatever they receive is laid by to answer notes which are offered for payment; but whenever a draught is made upon them for the money thrown in as above, they pay in paper.

As we are here searching after principles, not after facts, it is out of our way to inquire what may be the real proportion of coin preserved by banks of circulation, for answering the demand for it.

Mr. Megens, a very knowing man, and a very judicious author, lately dead, who has writ a small treatise in the German tongue, translated into English, under the title of The Universal Merchant, delivers his sentiments concerning the proportion of coin preserved in the bank of England, which I shall here transcribe in the translator’s words. Sect. 60.

The bank of England consists of two sorts of creditors, the one of that set of men, who, in King William’s time, when money was scarce and dear, lent the public 1,200,000 pounds, at 8 per cent. interest, and 4000 pounds were allowed them for charges, amounting in whole to 100,000 pounds a year, an exclusive right of banking as a corporation for 13 years, under the denomination of the proprietors of the bank; and which, for obtaining prolongation of their privileges, has been since increased by farther loans to the public at a less interest, to near the sum of 11,000,000 pounds, which if we compute the interest at 3 per cent. (as what they have more on some part answers incident charges) it produces 330,000 pounds a year; and as they divide annually 5 per cent. to their proprietors, which, is 550,000 pounds, it is evident that they make a yearly profit of 220,000 pounds, out of the money of the people who keep cash with them, and these are the other sort of creditors: and as for what money the bank lends to the government, they have for the most part but 3 per cent. interest, I conclude that the credit cash they have in their hands may amount to 11,000,000 pounds, and thereout is employed in loans to the government, discounting of bills, and in buying gold and silver 7,333,333⅓ pounds, which at 3 per cent. interest or profit, will amount to the above 220,000 pounds, and remains 3,666,666⅔ pounds in cash, sufficient for circulation and current payments. And experience has evinced, that whenever any mistrust has occasioned any run upon the bank for any continuance, and the people not finding the treasure so soon exhausted as they surmised, it flowed in again faster on the one hand than it was drawn out on the other.

This gentleman lived long in England. He was very intelligent in matters relating to commerce; and his authority may, I believe, be relied on as much as on any other, except that of the bank itself; which, it would appear, has some interest in keeping those affairs a secret.

We see by his account, that the bank of England keeps in coin ⅓ of the value of all their notes in circulation. With this quantity, business is carried on with great smoothness, owing to the prosperity of that kingdom, which seldom owes any considerable balance to other nations.

But the consequence of the obligation to pay in coin, is, that when the nation comes to owe a balance, the notes which the bank had issued to support domestic circulation only, come upon it for payment of a foreign balance; and thereby the coin which it had provided for home demand only, is drawn out.

It is this circumstance, above all others, which distresses banks of circulation. Were it not for this, the obligation to pay in coin might easily be discharged; but when in virtue of this pure obligation, a heavy national balance is demanded of the bank, which has only made provision for the current and ordinary demand at home, it requires a little combination to find out, at once, an easy remedy.

This combination we shall, in the following chapters, endeavour to unfold: it is by far the most intricate, and at the same time the most important in the whole doctrine of banks of circulation.

Another inconvenience resulting from this obligation to pay in coin, we have explained in the third book. It is, that the confusion of the English coin, and the lightness of a great part of it, obliges the bank of England to purchase the metals at a price far above that which they can draw back for them after they are coined. We have there shewn the great profit that might be made in melting down and exporting the heavy species. This profit turns out a real loss to the bank of England, which is constantly obliged to provide new coin, in proportion as it is wanted. This inconvenience is not directly felt by banks, in countries where there is no mint established.

Here then is another bad consequence of this obligation to pay in the metals, which a proper regulation of the coin would immediately remove. In countries which abound in coin, banking is an easy trade, when once their credit is well established. It is only when either a foreign war, or a wrong balance of trade has carried off the metals, that the weight of this obligation to pay in coin is severely felt.

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CHAP. VIII. How a wrong Balance of Trade affects Banks of Circulation.

It is commonly said, that when there is a balance due by any nation, upon the whole of their mercantile transactions with the rest of the world, such balance must be paid in coin. This we call a wrong balance. Those who transact the payment of this balance, are those who regulate the course of exchange; and we may suppose, without the least danger of being deceived, that the course is always higher than the expence of procuring and transporting the metals; because the overcharge is profit to the exchanger, who without that profit could not carry on his business.

These exchangers, then, must have a command of coin; and where can they get it so easily, and so readily, as from banks who are bound to pay in it?

Every merchant who imports foreign commodities, must be supposed to have value in his hands from the sale of them; but this value must consist in the money of the country: if that be mostly bank paper, he must give the bank paper to the exchangers for a bill, whose business it is to place funds in those parts upon which bills are demanded. The exchanger again (to support that fund which he exhausts by his draughts) must demand coin from the banks, for the notes he received from the merchant when he gave him the foreign bill.

Besides the wrong balances of trade transacted in this manner, which banks are constantly obliged to make good in coin, every other payment made to foreigners has the same effect. It is not because it is a balance of trade, but because it is a payment which cannot be made in paper currency, that a demand is made for coin. Coin we have called the money of the world, as notes may be called the money of the society. The first then must be procured when we pay a balance to foreigners; the last is full as good when we pay among ourselves.

It is proper, however, to observe, that there is a great difference between the wrong balance of trade, and the general balance of payments. The first marks the total loss of the nation when her imports exceed the value of her exports; the second comprehends three other articles, viz. 1. the expence of the natives in foreign countries; 2. the payment of all debts, principal and interest, due to foreigners; 3. the lending to other nations.

These three I call the general balance of foreign payments: and these added to the wrong balance of trade may be called the grand balance with the world.

Now as long as the payment of this grand balance is negotiated by exchangers, all the coin required to make it good, must be at the charge of banks.

How then is this coin to be procured by nations who have no mines of their own?

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CHAP. IX. _How a grand Balance may be paid by Banks, without the assistance of Coin._

Did all the circulation of a country consist in coin, this grand balance, as we have called it, would be paid out of the coin, to the diminution of it.

We have said that the acquisition of coin, or of the precious metals, adds to the intrinsic value of a country, as much as if a portion of territory were added to it. The truth of this proposition will now soon appear evident.

We have also said, that the creation of symbolical money, adds no additional wealth to a country, but only provides a fund of circulation out of solid property; which enables the proprietors to consume and to pay proportionally for their consumption: and we have shewn how by this contrivance trade and industry are made to flourish.

May we not conclude, from these principles, that as nations who have coin, pay their grand balance out of their coin, to the diminution of that species of their property, so nations who have melted down their solid property into symbolical money, must pay their grand balance out of the symbolical money; that is to say, out of the solid property of which it is the symbol?

But this solid property cannot be sent abroad; and it is alleged that nothing but coin can be employed in paying this grand balance. To this I answer, that in such a case the credit of a bank may step in, without which a nation which runs short of coin, and which comes to owe a grand balance must quickly be undone.

We have said that while exchangers transact the balance, the whole load of providing coin lies upon banks. Now the whole solid property melted down, in their paper, is in their hands; because I consider the securities given them for their paper, to be the same as the property itself. Upon this property, there is a yearly interest paid to the bank: this interest, then, must be engaged by them to foreigners, in lieu of what is owing to them by the nation; and when once a fund is borrowed upon it abroad, the rest is easy to the bank. This shall be further explained as we go along.

I do not pretend that the common operation of providing coin, when the grand balance is against a nation, is as simple as I have represented it. I know it is not: and I know also, that I am not in any degree capable to explain the infinite combination of mercantile operations necessary to bring it about; but it is no less true, that these combinations may be shortened: because when the whole of them have been gone through, the transaction must land in what I have said; to wit, that either the grand balance must be paid out of the national stock of coin, or it must be furnished by foreigners upon a loan from them; the interest of which must be paid out of that part of the solid property of the nation which has been melted down into paper. I say farther, that were not all this solid property, so melted down, in the hands of banks, who thereby have established to themselves an enormous mercantile credit; there would be no possibility of conducing such an operation: that is to say, there would be no possibility for nations to run in debt to nations, upon the security of their respective landed property.

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CHAP. X. Insufficiency of temporary Credits for the Payment of a wrong Balance.

I have said, that when the national stock of coin is not sufficient to provide banks with the quantity demanded of them, for the payment of the grand balance, that a loan must take place. To this it may be objected, that a credit is sufficient to procure coin, without having recourse to a formal loan. The difference I make between a loan and a credit consists in this, that, by a credit we understand a temporary advance of money, which the person who gives the credit expects to have repaid in a short time, with interest for the advance, and commission for the credit; whereas by a loan we understand the lending of money for an indefinite time, with interest during non-payment.

Now I say, the credit, in this case, will not answer the purpose of supplying a deficiency of coin; unless the deficiency has been accidental, and that a return of coin, from a new favourable grand balance, be quickly expected. The credit will indeed answer the present exigency; but the moment this credit comes to be replaced, it must be replaced either by a loan, or by a supply of coin; but, by the supposition, coin is found to be wanting for paying the grand balance; consequently, nothing but a loan, made by the lenders either in coin, in the metals, or in a liberty to draw, can remove the inconvenience; and if recourse be had to credit, instead of the loan, the same difficulty will recur, whenever that credit comes to be made good by repayment.

Upon the whole, we may conclude, that nations who owe a balance to other nations, must pay it either with their coin, or with solid property; consequently, the acquisition of coin is, in this particular, as advantageous as the acquisition of lands; but when coin is not to be procured, the transmission of the solid property to foreign creditors is an operation which banks must undertake; because it is they who are obliged either to do that, or to pay in coin.

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CHAP. XI. _Of the Hurt resulting to Banks, when they leave the Payment of a wrong Balance to Exchangers._

We have seen in a former chapter, how exchangers and banks are mutually assistant to one another: the exchangers by swelling and supporting circulation; the bank by supplying them with credit for that purpose. While parties are united by a common interest, all goes well: but interest divides, by the same principle that it unites.

No sooner does a nation incur a balance against itself, than exchangers set themselves to work to make a fortune, by conducting the operation of paying it. They appear then in the light of political usurers, to a spendthrift heir who has no guardian. The guardian should be the bank, who, upon such occasions, (and upon such only) ought to interpose between the nation and her foreign creditors. This it may do, by constituting itself at once debtor for the whole balance, and by taking foreign exchange into its hand, until such time as it shall have distributed the debt it has contracted for the nation, among those individuals who really owe it. This operation performed, exchange may be left to those who make that branch their business, because then they will find no opportunity of combining either against the interest of the bank or of individuals.

When a national bank neglects so necessary a duty, as well as so necessary a precaution, the whole class of exchangers become united by a common interest against it; and the country is torn to pieces, by the fruitless attempt it makes to support itself, without the help of the only expedient that can relieve it.

Those exchangers having the grand balance to transact with other nations, make use of their credits with the bank, or of its notes, to draw from it their coin, in order to export it. This throws a great load upon the bank, which is constantly obliged to provide a sufficient quantity for answering all demands; for we have laid it down as a principle, that whatever coin or bills are necessary to pay this grand balance, in every way it can be transacted, it must ultimately be paid by the bank; because whoever wants coin for any purpose, and has bank notes, can force the bank to pay in coin, or stop payment.

It cannot, therefore, be said, that exchangers do wrong; nor can they be blamed, in drawing from the bank whatever is wanted for the purpose of paying to foreigners what is their due; that is, what is justly owing to them. If they do more, they must hurt themselves; because whatever is sent abroad more than is due, must constitute the rest of the world debtors to the country which sends out their coin. The consequence of this is to turn exchange against foreigners, and to make it favourable for the nation which is creditor. In this case, were the creditors still to continue sending coin abroad, they would lose by that operation, for the same reason that they gain, by sending it out when they are debtors.

It is very common for banks to complain, when coin is hard to be procured, and when large demands are made upon them; they then allege unfair dealings against exchangers; they fall to work to estimate the balance of trade, and endeavour to show that it is not in reality against the country.

But alas! this is nothing to the purpose; the balance of trade may be very favourable, although the balance of payments be greatly against the country; and both must be paid, while the bank has a shilling of cash, or a note in circulation. So soon again as the grand balance is fairly paid off, it is impossible that any one can find an advantage in drawing coin from a bank; except in the single case of melting down the heavy species, in nations which give their coinage gratis. Of this we have treated at sufficient length in another place.

Banks may indeed complain, that men of property are sometimes sending their money out of the country, at a time when it is already drained of its coin; that this raises exchange, and hurts the trading interest.

Exchange must rise, no doubt, in proportion as the grand balance is great, and difficult to be paid: But where does the blame lie? Who ought to provide the coin, or the bills for paying this grand balance? Have we not shewn that it is the bank alone who ought to provide coin for the ready answering of their notes? Have we not said, that the method of doing this is by sacrificing a part of the interest due upon the obligations in their hands, secured upon the solid property of the country, and by the means of foreign loans upon that fund, to procure either the metals themselves, or a power to draw on those places where the nation’s creditors reside?

Which of the two has most reason to complain, the bank, because the inhabitants think fit to send their effects out of the country, being either forced so to do by their creditors, or choosing so to do for their private advantage; or the creditors of the bank, and the country in general, when, from the obstructions the bank throws in the way, when required to pay its notes, exchange is forced up to an exorbitant height; the value of what private merchants owe to strangers is raised; and when, by discouraging trade in their hands, a general stop is put to manufactures and credit in general?

In a word, the bank has no reason to complain, unless they can make it appear, how any person, exchanger or other, can find an advantage in sending coin out of the country, at a time when there is no demand for it; or when there is no near prospect of it, which is the same thing? To say that a principle of public spirit should prevent a person from doing with his property what is most to his advantage, in favour of saving some money to a bank, is supposing the bank to be the public, instead of being the servant of the public.

Another argument to prove that no profit can be made by sending out coin, except when the balance is against a country, is, that we see all runs upon banks stop, the moment exchange becomes favourable. Were there a profit to be made upon sending off coin, independently of the debts to be paid with it, which cannot be paid without it, the same trade would be profitable at all times. As this is not the case, it follows, that the principle we have laid down is just; to wit, that the balance due to foreigners must be paid by banks, while they have a note in circulation; and when once it is fairly paid by them, all extraordinary demands must cease.

We now proceed to another point, to wit, What are the consequences to circulation, when a great balance draws away a large quantity of coin from the bank, and sends it out of the country?

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CHAP. XII. How the Payment of a wrong Balance affects Circulation.

That I may communicate my ideas with the greater precision, I must here enter into a short detail of some principles, and then reason on a supposition.

It has been said, that the consequence of credit and paper-money, secured on solid property, was to augment the mass of the circulating equivalent, in proportion to the uses found for it.

These uses may be comprehended under two general heads. The first, payment of what one owes; the second, buying what one has occasion for: the one and the other may be called by the general term of ready-money demands.

Whoever has a ready-money demand upon him, and property at the same time, ought to be furnished with money by banks which lend upon mortgage.

Now the state of trade, manufactures, modes of living, and the customary expence of the inhabitants, when taken all together, regulate and determine what we may call the mass of ready-money demands, that is, of alienation. To operate this multiplicity of payments, a certain proportion of money is necessary. This proportion again may increase or diminish according to circumstances; although the quantity of alienation should continue the same.

To make this evident, let us suppose the accounts of a whole city kept by one man; alienation will go on without any payment at all, until accounts are cleared; and then nothing will be paid, but general balances upon the whole. This however is only by the bye. The point in hand is to agree, that a certain sum of money is necessary for carrying on domestic alienation; that is, for satisfying ready-money demands: let us call this quantity (A).

Next, in most countries in Europe, (I may say all) it is customary to circulate coin, which, for many uses, is found fitter than paper, (no matter for what reason); custom has established it, and with custom even statesmen must comply.

The paper-money is generally made payable in coin; from custom also. Now, according to the manners of the country, more or less coin is required for domestic circulation. Let it be observed, that hitherto we have not attended to foreign circulation, of which presently: and I say, that the manners of a country may make more or less coin necessary, for circulating the same quantity of paper; merchants, for instance, circulate much paper and little coin; gamesters much coin, and little paper: one example is sufficient.

Let this quantity of coin, necessary for circulating the paper-money, be called (B), and let the paper be called (C); consequently (A) will be equal to the sum of (B) and (C). Again, we have said, that all balances owing by nation to nation, are paid either in coin, in the metals, or in bills; and that bank paper can be of no use in such payments. Let the quantity of the metals, coin, or bills, going out or coming into the country for payment of such balance, be called (D).

These short designations premised, we may reason with more precision. (A) is the total mass of money (coin and paper) necessary at home: (A) is composed of (B) the coin, and of (C) the paper, and (D) stands for that mass of coin, or metal, or bills, which goes and comes according as the grand balance is favourable or unfavourable with other nations.

Now, from what has been said, we may determine, that there should at all times remain in the country, or in the bank, a quantity of coin equal to (B); and if this be ever found to fall short, the bank does not discharge its duty. It is unnecessary to determine what part of (B) should be locked up in the bank, and what part should remain in circulation: banks themselves cannot determine that question: all we need to say is, that it is the profit of banks to accustom people to the use of paper as much as possible; and therefore they will draw to themselves as much coin as they can.

When a favourable balance of trade brings exchange below par, and brings coin into the country, the consequence is, either to animate trade and industry, to augment the mass of payments, to swell (A), and still to preserve (C) in circulation; or to make (A) regorge, so as to sink the interest of money below the bank lending price; and then people will carry back the regorging part of (C) to the bank, and withdraw their securities; which is consolidating, as we have called it, the property which had been formerly melted down, for want of this circulating equivalent (money).

This is constantly the consequence of a stagnation of paper, from an overcharge of it, thrown into circulation. It returns upon the bank, and diminishes the mass of their securities, but never that of their coin.

From this we may conclude, that the circulation of a country can only absorb a determinate quantity of money (coin and paper); and that the less use they make of coin, the more use they will make of paper, and vice versa.

We may also conclude, that when trade and alienation increase, cæteris paribus, so will money; that is, more solid property will be melted down; and when trade and alienation diminish, cæteris paribus, so will money; that is, some of the solid property formerly melted down, will consolidate, as we have called it.

These vicissitudes in the mass of circulation are not peculiar to paper currency. In countries where nothing circulates but the metals, the case is the same; only the operation is more aukward and expensive. When coin becomes scarce there, it is hardly possible, in remote provinces, to find any credit at all: and in the center of circulation, the use of it (interest) must rise very considerably, and stand high for some time, before even intelligent merchants will import bullion to the mint; which is the only bank they have to fit it for circulation. When the metal is coined, then men of property are enabled to borrow, or to sell their lands. On the other hand, when a favourable balance pours in a superfluity of coin, and at the same time cuts off the demands of trade for sending it abroad, it frequently falls into coffers; where it becomes as useless as if it were in the mine; and this clumsy circulation, as I may call it, prevents it from coming into the hands of those who would have occasion for it, did they but know where to come at it. Paper, on the other hand, when banks and trade are well established, is always to be found. Thus, in an instant, paper-money either creates or extinguishes an interest equal to its value, in favour of the possessor. No part of it lies dead, not for a day, when employed in trade: it is not so of coin.

We must now suppose a bank established in a country which owes a balance to other nations.

In this case, the bank must possess, or be able to command, a sum of coin or bills equal to (B) and (D); (B) for domestic, and (D) for foreign circulation.

Those who owe this balance (D), and who are supposed to have value for it, in the currency of the country, in order to pay it, must either exhaust a part of (B), by sending it away, or they must carry a part of (C) to the bank, to be paid for in coin. If they pick up a part of (B) in the country, then the coin in circulation, being diminished below its proportion, the possessors of (C) will come upon the bank for a supply, in order to make up (B) to its former standard. Banks complain without reason. If they carry part of (C) to be changed at the bank, for the payment of (D), they thereby diminish the quantity of (C); consequently there will be a demand upon the bank for more notes, to support domestic circulation; because those which have been paid in coin are returned to the bank, and have diminished the mass of (C); which therefore must be replaced by a new melting down of solid property.

Now I must here observe, that this recruit, issued to fill up (C) to the level, is an addition made to the mass of securities formerly lodged with the bank; and represents, not improperly, that part of the landed property of a country which the bank must dispose of to foreigners, in order to procure from them the coin or bills necessary for answering the demand of (D).

When notes, therefore, are carried to the bank for payment of debts due to the bank, they then diminish the mass of solid property melted down in the securities lodged in the bank: but when notes are carried to the bank, to be converted into coin or bills, for foreign exportation, they do not diminish the mass of the securities: on the contrary, the consequence is, to pave the way for the augmentation of them; because I suppose that the notes, so given in to the bank, and taken out of the circle, are to be replaced by the bank to domestic circulation, to which they belonged; and the bank must be at the expence of turning the value of these additional securities granted for them into coin or foreign bills.

Is not this quite consistent with reason, fact, and common sense? If a country contracts debts to foreigners, is it not just the same case as when one man contracts a debt to another in the same society? Must not the ultimate consequence of this debt be, that it must be paid, either with the coin, with the moveables, or with the solid property of the debtor, transferred to the creditor, in lieu of the money owing?

When a nation can pay with its coin, or with its effects, (that is to say, with its product and manufactures) the operation is easily and mechanically performed by the means of trade: when these objects are not sufficient; or when land, or an annual and perpetual income out of it, must make up the deficiency; then more skill and expence is required; and this expence falling upon banks, makes their trade less lucrative than in times when commerce stands at par, or is bringing in a balance.

Were trade to run constantly against a country, the consequence would be, that the whole property of it would, by degrees, be transferred to foreigners. This the bank of St. George at Genoa has operated with regard to Corsica, as has been observed. But in that case, banks never could neglect laying down a plan whereby to avoid the loss they casually sustain, when such a revolution comes suddenly or unexpectedly upon them.

The method would be, to establish an annual subscription abroad, for borrowing a sum equivalent to the grand balance; the condition being to pay the interest of the subscriptions out of the revenue of the country.

If the security offered be good, there is no fear but subscribers will be found, while there is an ounce of gold and silver in Europe.

The bank of England has an expedient of another nature, in what they call their circulation; which is a premium granted to certain persons, upon an obligation to pay a certain sum of coin upon demand. This is done with a view to answer upon pressing occasions. But England being a prosperous trading nation, which seldom has any considerable grand balance against her, (except in time of war, when the public borrowings supply in a great measure the deficiency, as shall be afterwards explained) this bank circulation is turned into a job; the subscriptions being lucrative, are distributed among the proprietors themselves, who make no provision for the demand; and were it again to come, (as has been the case) the subscribers would, as formerly, make a call on the bank itself, by picking up their notes, and pay their subscriptions with the bank’s own coin.

To obviate this inconvenience, which was severely felt in the year 1745, the bank of England should have opened a subscription in some foreign country; Holland, for example; where she might have procured large quantities of foreign coin: such a seasonable supply would have proved a real augmentation of the metals; the supply they got from their own domestic subscribers was only fictitious[8].

Footnote 8:

At this time there was another circumstance, besides the demand of a balance to be paid abroad, which distressed the bank, viz. a suspicion which took place, that if the rebellion had succeeded, the credit of the bank would have totally failed. This very case points out the great advantage of banks upon mortgage of private credit.

We have said, that the credit of such banks ought to be established upon the principles of private securities only. If their notes be issued upon solid property, then no rebellion can influence them: but of this more hereafter.

But banks in prosperous trading nations sit down with casual and temporary inconveniencies; and exchangers carry on a profitable trade, whether the nation be gaining or losing all the while. For such nations, and such only, are banks advantageous. Were banks established in Spain, Portugal, or any other country which pays a constant balance from the produce of their mines, they would only help on their ruin a little faster.

In the infancy of banking, and in countries where the true principles of the trade are not well understood, we find banks taking a general alarm, whenever a wrong balance of trade occasions a run upon them. This terror drives them to expedients for supporting their credit, which we are now to examine, and which we shall find to have a quite contrary tendency.

The better to explain this combination, we must recall to mind, that the payment of the grand balance in coin or bills is unavoidable to banks. We have said that this balance is commonly paid by exchangers, who pick up the coin in circulation; a thing the bank cannot prevent. This we have called exhausting a part of (B): the consequence of this is, to make the proprietors of (C) come upon the bank, and demand coin for filling up (B): to this the bank must also agree. But by these operations (C) comes to be diminished, below the level necessary for carrying on trade, industry, and alienation: upon which I have said there commonly comes an application to the bank to give more credit, in order to support domestic circulation, which if complied with, more solid property is consequently melted down.

This swells the mass of securities, and raises (A) to its former level. But here the bank has an option to refuse more credit: in the former operations it had none. Now if the bank, from a terror of being drained of coin, should refuse to issue notes upon new credits, for the demands of domestic circulation; in this case, I say, they fail in their duty to the nation, as banks, and hurt their own interest. As to their duty to the nation, I shall not insist upon it; but I think I can demonstrate that they fail in point of combination, with respect to their own interest, and that is enough.

I say, then, that as long as there is one single note in circulation, and any part of a grand balance owing, that note will come upon the bank for payment, without a possibility of its avoiding the demand. Refusing therefore credit, while any notes remain in the hands of the public, is refusing an interest which may help to make up the past losses: but of this more hereafter.

In the next place, I think I have demonstrated, that so soon as the grand balance is paid, it is impossible that any more demands for coin can come upon the bank for exportation. Why then should a bank do so signal a prejudice to their country, as to refuse to lend them paper, which the ready-money demands of the country must suspend in circulation? And why do this at so great a loss to themselves? It has been said above, and I think with justice, that this recruit, issued to fill up circulation, adds to the mass of bank securities, and very properly represents that part of the income of the solid property of the country, which the bank must dispose of to foreigners, in order to procure from them the coin or bills necessary for answering the demand of payment of a grand balance.

In this light nothing can appear more imprudent, than to refuse credit.

A bank is forced to pay to the last farthing of this balance; by paying it, the notes that were necessary for circulation are returned to them; and they refuse to replace them, for fear that their supplying circulation should create a new balance against them! This is voluntarily taking on themselves all the loss of banking, and rejecting the advantages.

Such management can only be prudent when the circulating notes of a bank are very few, and when the balance is very great. In that case, indeed, were the thing possible, it might be prudent to give over banking for a while, till matters took a favourable turn. But if we suppose their notes to exceed the balance due, then all the hurt which can be done is done already; and the more notes are issued, and the more credit is given, so much the better; because the interest upon all that is issued above the balance, must be clear profit to the bank.

To bring what has been said within a narrower compass, and to lay it under our eye at once, let us call the domestic circulation of a country, where a bank is established, (A).

The specie itself, to carry it on, (B).

The balances to other nations, (D).

The bank must have a command of credit and coin equal to the sum of (B) and (D). If they have the value of (D) in any foreign place, where a general circulation of exchange is carried on; then they have only occasion for (B) at home, and can furnish bills to the amount of (D).

If (D), in consequence of bills drawn, shall come to be exhausted, the bank must replace it again, by new contracts, to strangers.

But as soon as (D) is paid, either in coin or in bills, then whatever coin is drawn from the bank, and sent away by private people, (exchangers, &c.) must form a balance due to the country; which balance will render exchange favourable, and will occasion a loss to those who sent away the coin. In this case, the more credit the bank gives, so much more will their profits increase.

To conclude: Let banks never complain of those who demand coin of them, except in the case when it is demanded in order to be melted down, or for domestic circulation, which may as well be carried on with paper.

And so soon as a demand for coin to pay a foreign balance begins, it is then both the duty and interest of all good citizens to be as assistant as possible to banks, by contenting themselves with paper for their own occasions, and by throwing into the bank all the coin which casually falls into their hands. As to duty, I shall offer no argument to enforce it. But I say it becomes a national concern to assist the bank; because the loss incurred by the bank in procuring coin, falls ultimately on every individual, by raising exchange; consequently, prices, by raising the interest of money to be borrowed; and last of all, by constituting a perpetual interest to be paid to foreigners, out of the revenue of the solid property of the country. Upon such occasions, a good citizen ought to blush at pulling out a purse, when his own interest, and that of his country, should make him satisfied with a pocket book.

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CHAP. XIII. _Continuation of the same Subject; and of the Principles upon which Banks ought to borrow Abroad, and give credit at Home._

In every question relative to this subject, we must return to principles. This is the only sure method of avoiding error. The intelligent reader, therefore, must excuse short repetitions, and consider them as a sacrifice he is making to those of slower capacities, to whom they are useful.

The principle of banking upon mortgage, is to lend and give credit to those who have property, and a desire to melt it down. This is calculated for the benefit of trade, and for an encouragement to industry. If such banks, therefore, borrow, it must be done consistently with the principles upon which their banking is founded. If the borrowing should tend to destroy those advantages which their lending had procured, then the operation is contrary to principles, and abusive. So much for recapitulation.

While trade flourishes and brings in a balance, banks never have occasion to borrow; it is then they lend and give credit. This, I believe, we may take for granted.

When the country where the bank is established begins to owe a balance to other nations, the bank, as we have seen in the last chapter, is obliged to pay it in coin or in bills. We have there shewn, that in such cases it is inconsistent with their principles and interest, to withhold lending and giving credit, so far as is necessary for keeping up the fund of circulation to that standard which alienation and ready money demands require.

To refuse credit, and at the same time to borrow at home, must then, at first sight, appear to be doubly inconsistent. But in order to set this point in the clearest light I am capable, I shall reason upon a supposition analogous to the situation of the Scotch banks, and by that means avoid abstraction as much as I can.

Let me then suppose that Scotland, during the last years of the war ended in 1763, and ever since (I write in 1764) from the unavoidable distress of the times, was obliged, 1. to import considerable quantities of grain in some bad years; 2. to refund the English loans of money settled there in former times; 3. to furnish some of the inhabitants with funds, which they thought fit to place in England; 4. to pay the amount of additional taxes imposed during the war; while, at the same time, several of the ordinary resources were withdrawn; such as, 1. a great part of the industrious inhabitants who went to supply the fleets and armies; 2. the absence of the ordinary contingent of troops; and 3. the cutting off several beneficial articles of commerce. Let me suppose, I say, that from a combination of these losses incurred, and advantages suspended, Scotland has lost annually, for eight years past, two hundred thousand pounds. I am no competent judge of the exactness of this estimate, it is of no consequence to the argument; but I think I am far beyond the true computation.

On the other hand, let me suppose, that the sum of currency in paper, sufficient (with the little coin there was) to circulate the whole of the alienations in Scotland, (that is to say, the whole domestic circulation, supposing no balance to be owing to England or other countries) to be one million sterling. I am persuaded I am here below the true estimate, but no matter.

Is it not evident, from this supposition, and from the principles we have been deducing, that unless the banks of Scotland had alienated annually in favour of England, a fund for paying the interest of two hundred thousand pounds capital, and either brought down the coin, or given bills on London for the sum of that capital every year; that the million of Scots currency would have been diminished in proportion to the deficiency; and would not the consequence of that be, cæteris paribus, to bring the currency below the demand for it; and, consequently, to hurt trade, industry, and alienation?

Now supposing the banks, instead of providing, in England, a fund equal to this grand balance, (as I have said they should do) to remain in consternation and inactivity, giving the whole of their attention to the providing coin and bills to supply the demand of exchangers, whose business it is to send out this annual balance; what will the consequence be?

I answer, that if the banks, in such a case, do not follow the plan I have proposed, the consequence will be, that two hundred thousand pounds of their paper will be, the first year, taken out of the domestic circulation of Scotland; will be carried to the bank, and coin demanded for it. If the coin is found in the bank, it is well; it goes away, and leaves the paper circulation of Scotland at 800,000_l_. This void must occasion applications to the bank for credits to supply it. Is it not then the interest of the bank to supply it? We have said in the former chapters that it is. But now let us suppose it objected, that if banks should issue notes at such a time, their cash having been exhausted, they would be obliged to stop altogether, upon a return of those notes issued upon additional credits.

To this I repeat again, because of the importance of the subject, that notes issued to support the demand of circulation never can return upon the bank, so as to form a demand for coin; and if they do return, it must be in order to extinguish the securities granted by those who have credit in bank (I except always that regular demand for coin, at all times necessary for circulating the paper for domestic uses) and if those notes return of themselves, without being called in, this phænomenon would be a proof that circulation is diminishing of itself: but supposing such a case to happen, it is plain that such return can produce no call for coin; because when the notes return it is not for coin, but for acquitting an obligation or mortgage, as has been often repeated.

Notes are paid in, I say, because circulation has thrown them out. Now if circulation has thrown them out as superfluous, it never can have occasion for coin in their stead; because coin answers the same purpose.

But then it is urged that they do not return, because circulation has thrown them out, but because coin is wanted: be it so. Then we must say, that circulation is not diminished, as we at first supposed; but that the return of another year’s balance, makes a new demand for coin necessary.

Now I ask, how the withholding this 200,000_l._ from circulation, after the first year’s drain, can prevent the balance from returning? There are by the supposition still 800,000_l._ of notes in the country; will not exchangers get hold of two hundred thousand out of this fund, as well as out of the million? For he who owes, must pay, that is, must circulate. It is only the circulation of the industrious, of the rich, in short buying, that is to say, voluntary circulation, which is stopped for want of currency: paying, that is, involuntary circulation, never can be stopped; debtors must find money, as long as there is any in the country, were they to give an acre for a shilling, or a house for half a crown. Now those who owe this foreign balance are debtors; consequently, they must draw 200,000_l._ out of circulation, the second year as the first, whether the standard million be filled up or not. The withholding, therefore, the credits demanded upon the first diminution, has not the least effect in preventing the demand for coin the year following: it only distresses the country, raising exchange, and the interest of money, by rendring money scarce; and what is the most absurd of all, it deprives the bank of 10,000_l._ a year interest, at 5 per cent. upon 200,000_l._ which it may issue anew.

Suppose again, that a second year’s demand for a balance of 200,000_l._ comes upon the bank: if the coin is out, as we may suppose that after such a drain it will not be in great plenty, expedients must be fallen upon. In such a case, if the bank does not at once fairly borrow at London (without any obligation to repay the capital) a sum of 200,000_l._ and pay for it a regular interest, according to the rate of money, with an obligation to pay, as government does, quarterly[9], on the change of London, it will be involved in expedients which will create a monstrous circulation of coin in the bank, perhaps double of the sum required, and all those operations will land in the end (as to the bank) in paying the interest of this sum out of the mass of its securities or stock. If the bank should borrow this 200,000_l._ in London, in the manner we have said, the circulating fund of coin will be nowise diminished; there will be no call extraordinary, no rising of exchange; the bank will have this in its hands; and if it rises, it is the bank, not the exchangers who will profit by it.

Footnote 9:

Although the interest or dividends on government securities be paid every half year only, yet by purchasing partly in one fund, and partly in another; for instance, half in Old South Sea annuities, and half in New, purchasers may have their interest paid quarterly.

But let us suppose that instead of this, it should have recourse to temporary credits upon which the capital is constantly demandable, or to other expedients still less effectual for answering the call which is to come upon it for the second year’s balance: what will be the consequence? To this I answer, that those merchants, or others who owe the balance, will apply to exchangers for bills, for which they must pay a high exchange: these bills will be bought from the exchangers with notes, (taken out of circulation) and will reduce this to 600,000_l._ the exchangers will carry these to the bank and demand coin. If the bank should make use of an optional clause, to pay in six months, with interest at 5 per cent. the exchangers will obtain six months credit at London, and in consequence of that, their bills will be honoured and paid. This credit costs them money, which is added to the exchange: the bank, at the end of six months, pays in coin, which in the interval it must provide from London. It pays also six months interest upon the paper formerly presented by the exchanger: add to the account, that bringing down the coin must cost the bank at least 12 shillings per hundred pounds, and as much more to the exchanger who receives it in order to send it back again; and after all these intricate operations which have cost so much trouble, ill blood, stagnation and diminution of circulation, expence in exchange to the debtors of the balance, stress of credit upon exchangers for procuring so large advances with commission, &c. expence to the bank in providing coin, expence to the exchangers in returning it; after all, I say, the operation lands in this: that 200,000_l._ of notes, taken out of the circulation of Scotland, returns to the bank who must have provided, at last, either coin, or credit at London for them. This return of 200,000_l._ of notes does not diminish the mass of those obligations lodged in the bank, in virtue of which they are creditors upon the proprietors of Scotland: consequently, the bank has constituted itself debtor to England for those funds which have been torn from it in the manner above described: consequently, had it, by a permanent loan, constituted itself voluntarily debtor to England from the beginning, it would have paid no more, nay less than it has been obliged to pay; circulation would not have lost 200,000_l._ and the bank would have had the interest of 200,000_l._ added to its former securities, which would compensate (pro tanto at least) the expence of borrowing that sum in England upon a permanent fund. Instead of which it compensates the interest of a temporary loan, with the same sum of interest taken out of the securities in its hand. If, therefore, from an ill grounded fear of issuing as much paper as is demanded, it shall withhold it, there results to itself a loss equal to the interest of what it refuses to lend; that is to say, there is a lucrum cessans to the bank of the interest of this 200,000_l._ at 5 per cent. or at 10,000_l._ a year; which other banking companies will fill up, and thereby extend their circulation.

If, besides refusing credits, it should call in any part of those already given, it still diminishes circulation: but then by that operation it diminishes the mass of its securities, and so diminishes the sum of the interest annually paid to itself. If it goes farther and borrows money at home, such loans will be made in its own paper, which will diminish farther the mass of circulation; and if it goes on recalling the credits and mortgages, it will soon draw every bit of its paper out of circulation, and remain creditor upon Scotland only for the balance it has paid to England on her account. Such are the consequences, when a bank which lends upon private security withholds credit, at a time when a national balance is due, and when applications are made to it for new credits, to fill up the void of circulation occasioned by the operations used for the payment of the balance: such also are the additional fatal consequences, when to this it adds so inconsistent an operation as that of borrowing in its own notes, or recalling the credits it had formerly given.

By the first step it only appears passive in allowing natural causes to destroy both the bank and the nation, as I think has been proved.

By the second, it is active in destroying both itself and the country.

What benefit can ever a bank which lends upon private security reap by borrowing within the country of which it is the center of circulation; nay, what benefit can it ever reap from withholding its notes from those who can give good security for them!

Every penny it borrows, or calls in, circumscribes its own profits, while it distresses the country. After all the combinations I have been able to make, I can discover but one motive which (through a false light) may engage a bank to this step, to wit, jealousy of other banks.

As this speculation is designed to illustrate the principles of circulation, from circumstances relative to the present state of the Scotch banks, let us call things by their names.

The banks of Edinburgh resemble, more than any other in Scotland, a national bank. Let me then suppose all that can be supposed, viz. that the abundance of their paper has given occasion to lesser banks to pick up from them every shilling of coin which these lesser banks have ever had; and that these have had the address also to throw the whole load of the balance upon those of Edinburgh: let this be supposed, more cannot, and let us allow farther, that this must ever continue to be the case. In these circumstances, what motive can the banks of Edinburgh have for withholding credit from those who are able to give security? What motive can they have for borrowing up their own notes?

Indeed I can account for this plan of management in no other way than by supposing, that disgusted at the long continuance of an unfavourable balance of trade against their country, and vexed to find the whole load of it thrown upon themselves, they have taken the resolution to abandon the trade, and are taking this method of recalling their paper altogether.

Let me suppose the contrary, and I shall not be able to discover how it is possible that such a conduct can turn to their own advantage, throwing out all consideration of the public good, which for some time, no doubt, must be greatly hurt by it.

As long as any considerable quantity of their notes is in circulation, and that the principal exchangers reside at Edinburgh, they never can avoid the loss of paying the balance; and by refusing to fill up the void occasioned by the return of their notes, they deliver the whole profit of replacing them to the other banks, their rivals.

Let me next estimate the losses they sustain by furnishing coin to the other banks, and for the payment of the balance; and then compare these with what they lose by not keeping circulation full.

I shall suppose the balance to cost them two hundred thousand pounds per annum; and I shall suppose that all the lesser banks put together have occasion for two hundred thousand pounds in their chests: Is not this computation far above what can possibly be supposed?

Will it be allowed that if the banks of Edinburgh willingly submit to pay the whole of the bills of exchange demanded on London, for this balance, they will have at least the preference in replacing that sum to circulation?

If they pay the balance of 200,000_l._ a like sum of their notes must come in to them, without diminishing one shilling of the interest paid upon the securities lodged in their banks; consequently, the only loss incurred is the difference between the interest they receive, which is 5 per cent. and what it would cost them to borrow a like sum in London, and to remit the interest of that sum four times a year.

Now the value of a 4 per cent. is at present about 96; so in paying 20_s._ per quarter on the change of London, the Edinburgh banks may have at London a capital of 96_l._ Let me call it only 94_l._ supposing their credit not to be quite so good as that of the funds. I think it as good to the full; and I am sure it is so. At this rate, the 200,000_l._ will cost them an interest of 8510_l._ instead of the 10,000_l._ which they will receive for the like sum added to their former securities. Now I suppose that they have recourse to exchangers to remit this interest, and that they pay for it 5 per cent. (which is an absurd supposition, as they will have the exchange entirely in their own hands) and that they give all the bills for the 200,000_l._ at par, (also a ridiculous supposition) the 5 per cent. on 8510_l._ is 425_l._ 10_s._ which added to the interest, makes 8935_l._ 10_s._ so that after all, they will have upon the whole transaction 1064_l._ 10_s._ of profit.

Next, as to the loss incurred in furnishing 200,000_l._ to the other banks: If this coin be demanded of them by those banks, the demanders must, for this purpose, draw 200,000_l._ of Edinburgh notes out of the circulation of Scotland; which I have supposed may be replaced in some little time by the Edinburgh-banks; consequently, if this sum also be borrowed at London, there will result upon this operation, as well as upon the last, a profit of 1064_l._ 10_s._ But then indeed they must be at the expence of bringing down the coin borrowed, at 12_s._ per 100_l._ because those banks will insist upon having coin, and refuse bills on London. This will cost 1200_l._ from which deduct the profit of 1064_l._ 10_s._ gained by the first operation, remains of loss upon this last transaction 135_l._ 10_s._ no great sum[10]. Does it not follow from this reasoning, that the banks of Edinburgh will have the whole business of exchange in their own hands? What exchanger then will enter into competition with them? The domestic transactions with the merchants and manufacturers of Scotland will be their only business. Farther,

Footnote 10:

We are not to suppose that this yearly balance of 200,000_l._ is always to continue. We have seen how it has been occasioned by a course of unfavourable circumstances, which have run Scotland in debt; we have seen how the banks may interpose their credit, in order to assist the country in paying it; and we shall see, before we dismiss this subject, how they will be enabled to repay it, and set Scotland free, by a return of a favourable balance upon their commerce. Let it then be remembred, that all those contractions in England are properly the debts of Scotland, not of the banks. Scotland, therefore, and not the banks, must be at all the expence thereby incurred. These points shall be explained as we go along.

What prevents the banks of Edinburgh to have offices in every trading town in Scotland, where their notes may be regularly paid on presentation, and new credits given as circulation demands them?

The only objection I can find to this plan of banking, is the difficulty of finding credit at London to borrow such large sums.

This, I think, may also be removed, from the plain principles of credit. If the banks of Edinburgh enter into a fair coalition, as they ought to do, I think, in order to form really a national bank, totally independent of that of England; may they not open a subscription at London, and establish a regular fund of their own, as well as any other company, such as the India, or South Sea? By borrowing in the beginning at a small advance of interest above the funds, and paying as regularly as government does, will not all those who make a trade of buying and selling stock fill their loan, rather than invest it in any other carrying a less interest? And if the whole land securities, and stocks of those banks at Edinburgh be pledged for this loan, will it not stand on as good a bottom as any fund upon earth? And can it be doubted but parliament will encourage such a scheme, upon laying the affairs of Scotland and the banks properly before them?

By this means they will really become a national bank: because England seems at present to be to Scotland, what all the rest of the world is to England. Now, the bank of England has no such fund of credit on the continent, that I know; and were that country to fall into as great distress, by a heavy balance, as Scotland has been, she would find as many difficulties in extricating herself by domestic borrowings, bank circulation, &c. as Scotland has found by the like domestic expedients. She would then be obliged, for her relief, to have recourse to a fund opened in Holland, Spain, or Portugal, like to what I propose for Scotland with respect to England.

I have heard it alledged, that the whole distress occasioned to the banks and circulation of Scotland, was occasioned by a false step taken by them, some years ago; at the time when the lowness of the English funds, and a prospect of a peace, occasioned great remittances from Scotland, and a withdrawing of the large capital of, perhaps, 500,000 l. owing in Scotland to English persons of property.

At that time, it is said, the banks imprudently launched out in giving extensive credits to the debtors of those capitals, and to those who wanted to remit the funds they had secured in the hands of people who could not pay them; that this threw a load of paper into circulation, which it could not suspend, being far beyond the extent of it; and that, consequently, the paper came back upon the bank, produced a run for coin, which soon exhausted, in a manner, all that was in Scotland; and that the country has never been able to recover itself since.

This representation is plausible, and has an air of being founded on principles: in order therefore to serve as a further illustration of the subject of circulation, I shall point out where the fallacy lies.

It is said the banks did wrong in giving those credits. I say, they did right; but they did wrong in not providing against the consequences.

Had they refused the credits, the English and other creditors would have fallen directly upon their debtors, and obliged them to pay, by a sale of their lands, at an under value; which, I think, would have been an infinite loss to Scotland. In this way the price would have been paid in bank paper, taken out of circulation; for we have said, that he who owes must pay, be the consequence what it will. This paper would have come upon the banks at any rate; and being a balance due to strangers, must have been paid by the banks. The banks therefore did right to supply the credits demanded; but then they might have foreseen that the whole load of paying those debts would fall upon them; which they being in no capacity to do, should have immediately pledged in England, the interest of the credits they had given out, after supplying the want of Scots circulation, and when the notes came in, they would have had at London the capital of that interest prepared for paying them off, and no inconvenience would have been found.

The only thing then the bank seem to have misjudged, was the granting those credits too hastily, and to people who perhaps would not have invested their funds in England, had it not been from their facility in giving credit.

Banks therefore should well examine the state of circulation, and of the grand balance, in difficult times, before they give credit. If circulation be full, they may, with justice, suspect that the credits are demanded with a view of expediency, to transport property out of the country, which otherwise might have remained. But in favour of circulation, or in favour of what might be exacted by foreign creditors, banks never can misjudge in giving credit; because, if they should refuse to do it, they in the first place incur a loss themselves; and in the second place, they diminish the fund of circulation, and thereby hurt the country. Now when, at such times, a credit is asked or given, that demand is a warning to banks to prepare; and by preparing they are ready, and no loss is incurred.

Upon the whole, it is an unspeakable advantage to a nation to have her foreign debts paid by her bank, rather than to remain exposed to the demands of private foreign creditors; because, when a bank pays them, I suppose her to do it upon a loan in the funding way, where the capital is not demandable by the creditor; whereas when private citizens are debtors to strangers, the capitals are always demandable; and when a call comes suddenly and unexpectedly, the country is distressed. What would become of Great Britain, if all her debts to strangers were demandable at any time? It is the individuals who owe, in effect, all that is due to foreigners; because they pay the interest: but they pay this interest to the public; and the public appears as the debtor to all strangers, who have no right to exact the capital, although the state may set itself free whenever it is convenient.

I have said above, that after all the combinations I had been able to form, I could discover but one motive to induce a bank to withhold credit at a time when it was demanded for the use of domestic circulation, viz. jealousy of other banks. What my combinations could not then discover, my inquiries have since unfolded.

It is said, that the banks finding so great a propensity in the inhabitants of Scotland to consume foreign manufactures and produce, fell upon this expediency of calling in the old, and of refusing new credits, in order to cut off such branches of hurtful luxury and expence.

Could the execution of such a plan prove a remedy against the vice complained of, this circumstance alone would more clearly demonstrate the utility of banks upon mortgage, than all I have been able to say in favour of that establishment.

Let us therefore have recourse to our principles, in order to discover what influence a bank can have in this particular.

We have distinguished between necessary and voluntary circulation: the necessary has the payment of debts; the voluntary has buying for its object.

We have said that he who owes is either a bankrupt, or must pay, as long as there is a shilling in the country.

But he who buys, or inclines to buy, must have money, or he can buy nothing; for if he buys on credit, he then falls immediately into the former category, and must pay.

By withholding money for the uses of circulation, which banks may do for some time, buying may be stopped; paying never can.

Now if the mass of money in circulation is brought so low, that the higher classes of the people, who consume foreign productions, cannot find money to buy with, what are we to suppose will be the case with manufacturers, and with the merchants who buy up their work? Could this operation of the bank affect the higher classes only, by curbing their anti-patriot expences, without affecting the lower classes, by curbing their industry, I should think it an admirable discovery. If it even could be made to affect those merchants and shop-keepers only, who deal in foreign commodities, so as to discourage them from carrying on that business, there would result from it a notable advantage.

But alas! wherein are they hurt? They trade in such commodities, not because they are bad citizens, but because they are freemen, and seek profit wherever the laws permit.

Perhaps, they find more difficulty than other people in forcing coin from the bank, as matters stand: perhaps, they are loaded with opprobrious appellations for extorting such payments from the bank: perhaps, their credits with the bank are recalled. But must not those who buy from them, pay them? And must not the bank give coin, or bills, for the notes they receive, when presented for payment? Why, therefore, throw difficulties in the way? All the world knows, that no human engine can prevent a merchant from laying all the expences of his trade upon the consumer. Correct the taste of the consumers, and you may stop the trade: no other restraint will be of any consequence. But in order to correct the taste of consumers, do not deprive them absolutely of money; because the money the landlord receives, comes from the farmer, for the price of his grain, &c. Would it be a good scheme for preventing soldiers from drinking brandy, to cut off their subsistence-money? Give a drunkard but a penny a day, it will go for liquor; and those who are fond of foreign clothing, will take the price of it from their bellies, to put it on their backs.

If this scheme of the bank’s withholding credit, proves, at present, any check to those dealers in English goods, it will be but for a very short time. They have been taken by surprize; and, perhaps, thrown into inconveniencies from an unexpected change of bank management; but as long as there is a demand for such commodities, there will be a supply; and when people owe, they must pay. No operation of a bank can prevent this.

I must, therefore, according to principles, disapprove of this public-spirited attempt in the banks of Edinburgh; because, if it should succeed, it will have the effect of ruining all the trade and industry of Scotland, in order to prevent the sale of English goods: and if it does not succeed, which is more than probable, from the assiduity of other banks in supplying credit, it will have the effect of ruining the banks of Edinburgh themselves.

This step, of calling in the bank credits, and opening a subscription for a loan, is represented by others in a light somewhat different.

By these it is alledged, that in the beginning of the year 1762, when the Edinburgh banks withdrew ¼ of all their cash accompts, and opened a subscription for borrowing-in their own notes, at an interest of 4, and even 5 per cent. the demand for money, to send to England, was not occasioned by the great balance owing by Scotland, but to the high premium money then bore at London; because, says the author of a letter to J... F...... Esq; published at that time,

“This demand arises from a profit on carrying money to London, as a commodity, and not as a balance of trade.”

It is not easy to comprehend how there could be much profit in carrying money to London at 3 per cent. loss by exchange, from Scotland, where it bore 5 per cent. interest.

It is true, that at certain times, there were considerable profits made upon stock-jobbing; by which some won, and others were ruined. I agree, that the country was greatly hurt by the folly of those who played away their own property, and by the roguery of others, who borrowed that of their neighbours, with an intention of gaming at their risk. But is this a vice which any bank can correct, while it has a note in circulation?

If, therefore, it was a sentiment of patriotism which moved the banks to such a plan of conduct, I say they thereby did more hurt to industry, by contracting circulation, than good to Scotland, by attempting a thing which was beyond their power to accomplish.

If they were moved to it by a principle of self preservation, I say they lost their aim, by cutting off their own profits, which would have done much more than indemnify them for the loss of borrowing at London, at the time when money there was hardest to be got: for whatever exorbitant expence of exchange gamesters may incur, to procure ready money to play with, the rate of the stocks at that time never was so low, as to afford a profit upon money remitted at 3 per cent. loss by exchange, while that money was bearing 5 per cent. interest at home.

The lowest rate of stocks was in January 1762. Towards the end of that month 3 per cents. fell to 63¼: this makes the value of money to be about 4_l_. 12_s._ per cent. In these funds, certainly, no body could invest, with profit, money sent from Scotland.

After the new subscription had been open for some time, scrip indeed, or 4 per cent. fell in this month so low as 74½, that is, money rose to 5.4 per cent. whereas had scrip stood at the proportion of the 3 per cents. it should have been worth about 84: but at the beginning of a war with Spain, when the minds of men were depressed, and filled with apprehensions, and when a new loan was perhaps expected at a higher interest than ever government had given, was it natural for people to be fond of investing in a 4 per cent. stock, which was to fall to 3 per cent. in a few years?

Besides, let us examine the profit to be made by investing even in that fund. 100_l._ produced in Scotland 5_l._ interest, that capital remitted to London at 3 per cent. exchange, was reduced to 97_l._: now if 74.5_l._ produced 4_l._ the produce of 97_l._ would be about 5_l._ 4_s._ Would any man for the sake of ⅕ per cent. advance of interest on money remitted, ever think of sending large sums to London to be invested in a falling stock?

I allow that, upon opening subscriptions, great profit was sometimes made by those who contracted with government, and who received the subscriptions at prime cost. But this profit depended entirely upon the subsequent rise of the subscription, when the original subscribers brought it first to market; as also from the small sums they had advanced: this operation was over before the end of January 1762. The smalness of the sum advanced, upon which the profit was made, and the ministerial interest which was necessary to obtain a share in those subscriptions, rendred it extremely difficult for people in Scotland to share in the profit by remitting large sums in the proper point of time.

Farther, might not the banks, in the short period during which such large profits were made, had they had the exchange in their hands, have raised it so high as to frustrate the attempts of our Scots gamesters? If it be said, that exchangers would have disappointed them, by giving it lower; I answer in the negative: because to that set of men exchange will rise, of itself, in proportion to the value of money in the place to which people incline to remit it. And could money at any time bring in, at London, 20 per cent. interest, exchange upon that place would rise universally in proportion.

The only motive, not already mentioned, for sending money to London at this time, under so great disadvantages, was the prospect of a great rise upon the stocks, in the event of a peace. Upon which I observe, that the value of that probability was included in the then price of stock; and had the probability of a peace, in January 1762, been great, stocks would have risen in proportion: he, therefore, who vested his money in stock, by remitting from Scotland at that time, upon an expectation peculiar to himself, I consider as a gamester, and as an ignorant gamester too; because he was giving odds upon an equal bett. This every man does, who, without any prospect of a profit peculiar to himself, pays a high exchange to bring money to a market, where he buys at the same price with those who pay no exchange at all.

From these considerations, I am led to differ from the ingenious author of the letter to J. F. Esq; who says, “That in the present case” (the circumstances operating in January 1762,) “the demand” (for money to remit to London) “is unlimited, and no provision the banks can make can be of use; on the contrary, could they find a treasure, suppose of a million, it would only serve to increase it; because this demand arises on a profit on carrying money to London as a commodity, and not as the balance of trade.”

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CHAP. XIV. Of optional Clauses contained in Bank Notes.

As we are examining the principles upon which banks of circulation upon mortgage, which issue notes payable in coin, are established in Scotland, it is proper to take notice of every circumstance which may arise from the extensive combination of the interests of trade and circulation, especially when we find such circumstances influencing the political welfare of society.

An optional clause in a bank note is added to prevent a sudden run upon banks, at a time when more coin may be demanded of them than they are in a capacity to pay.

Banks not regulated by statute, are private conventions, in which the parties may include what conditions they think fit. Banks, therefore, may insert in their notes, the conditions they judge most for their own advantage. Thus, they may either promise peremptory payment in coin upon demand, or they may put in an alternative, that in case they do not choose to pay in coin, they may pay in bills, or in transfer of their stock, or in other circulating paper not their own; or they may stipulate a certain space of time after the demand, with interest during the delay. All these alternatives are inserted, in order to avoid the inconvenience of running short of coin, and of being obliged to stop payment altogether.

We have said above, that the profits of banks consist in their enjoying the same interest for the notes they lend, as if the loan had been made in gold or silver. This is a very great object, no doubt; but the policy of nations has established it, and therefore we shall suppose it to be an uncontroverted principle.

In which ever way, therefore, an optional clause is inserted, it should be such as to cut off all profit from the bank, upon all paper presented for payment, from the time of presentation; and every artifice used to suspend the liquidation of the paper, to the advantage of the bank, and prejudice of the bearer, should be considered as unfair dealing in the bank, and prohibited by law.

When the optional clause has no tendency to procure advantage to the bank, in prejudice of the holder of the paper (except so far as the holder is thereby deprived of the use of coin, which on certain occasions cannot be supplied by the paper) it becomes the duty of a statesman to examine how far it is expedient to suffer such stipulations to be inserted, in a money which is calculated to carry on the mercantile interest of the nation.

Banks, we have said, are the servants of the public, and they are well paid for their services. Although the notes issued by them are not commonly made a legal tender in payment; yet the consequence of a well established bank, is to render them so essential to circulation, that what is not a legal obligation becomes one, in fact, from the force of custom.

Let us therefore examine the advantages which result to banks from this optional clause, and the loss which results to a nation from their use of it, and then compare the advantages with the inconveniencies, in order to determine whether or not it is expedient to permit such obstructions in the circulation of paper.

The advantages which banks reap is confined to that of gaining time, at the expence of paying interest. The interest paid by them is an aukward operation. They receive interest for the note; because they have in their possession the original security given for the notes when they were first issued; and they begin to refund this interest to the holder of the note from the time they make use of the optional clause. Could the banks, therefore, borrow coin in a moment, and pay the same interest for the coin which they pay to the holder of the note, they would certainly never make use of this optional clause. But this coin is not to be found in a moment; and the banks, to save themselves the trouble, and the expence of augmenting the fund of coin, or of procuring a fund out of another country, upon which they might draw for the payment of that national balance, which, by becoming banks, they tacitly engage to pay for the nation, render the credit of individuals precarious with strangers, and raise a general distrust of the whole society which they ought to serve. Here then is a very great loss resulting to a nation from the establishment of banks. Were no bank established, no merchant would contract a debt to strangers, without foreseeing the ready means of discharging it with the coin circulating in the country. In proportion as this coin came to diminish, so would foreign contractions of debt diminish also. Thus credit, at least, might be kept up, although trade might be circumscribed, and manufactures be discouraged. Now when, in order to advance trade and encourage manufactures, a statesman lends his hand towards the melting down of solid property, and countenances banks so far as to leave that operation to them, with the emolument of receiving interest for all their paper; and when, in order to facilitate the circulation of this paper, the very inhabitants concur in throwing all their specie into a bank, is it reasonable to indulge banks so far as to allow them to add an optional clause, which disappoints the whole scheme, which stops trade, ruins manufactures, raises the interest of money, and renders the operation of melting down property quite ineffectual for the purposes which it was intended to answer? Farther,

The loss a bank may be at, in providing coin, is susceptible of estimation, let it be brought from ever so distant a country; because we know that the quantity to be provided, never can exceed the value of the grand balance. But who can estimate the loss a nation sustains, when an interruption is put to carrying on trade and manufactures? When the industrious classes of inhabitants are forced to be idle for a short time, the consequences are hardly to be repaired: they starve, they desert; the spirit of industry is extinguished; in short, all goes to ruin.

Besides, when banks do not lay down a well digested plan for paying regularly, and without complaining, this grand balance due to strangers, they are forced to have recourse to expedients for preserving their credit, more burdensome, perhaps, than what is required of them; and not near so effectual for removing the inconveniences complained of.

The expedients they fall upon to obtain credit, coin, and bills, are so various, and so complicated, that they alone are able to explain them.

Sometimes we see them entring into contracts with private merchants and exchangers, (living among themselves!) who engage for a certain premium to furnish coin as it is demanded. The consequence of this, is, to expose the bank to a new demand for coin, from the very contractors, in order to fulfil their engagements; an abuse we have taken notice of above in speaking of the bank circulation of England.

Let us suppose that these undertakers for coin do really set out by doing in part what banks should effectually do themselves, that is, by bringing from another nation, the coin which they are to supply. What is the consequence? The banks pay the undertaker for this coin in their own notes. Did they only engage to pay a certain interest for the coin so provided, then the end would be accomplished, with the additional expence to them of paying the undertaker for his expence, trouble, and profit. But if they, instead of paying interest for the coin so furnished, shall issue their notes for the full value of it, such notes can never enter into domestic circulation, so as to be suspended in it as it were; because it is not domestic circulation which has demanded them: they must then return upon the bank, either from the very hand who received them, or at least, after a short circulation; and thus draw out again the whole coin furnished by the undertaker. This produces a prodigious circulation of coin, and induces people to imagine that either the grand balance is inexhaustible, or that the premium upon money at London is very high, or that people can contrive a fictitious balance, as a means of profiting upon coin, after the balance has been actually paid[11].

Footnote 11:

The directors of the bank of England have had recourse to a like expedient with as little success. They used, during the war, to buy up, with their paper, the coin brought in by privateers; and after they had been at this trouble, the notes they had given for it returned upon them, and drew it out again.

This method of providing coin is absolutely delusive, and opens a door to infinite abuse. Those who furnish the coin to the bank, are either in the combination against the bank, and draw it out as fast as they throw it in; or they are not in the combination: if they are in the combination, they profit by it; if they are not, they are hurt by their contract, and other exchangers draw the advantage; but the bank is equally a loser in both cases.

Let me suppose that they are not in the combination, and that they honestly procure the coin at their own expence. If they are paid in notes for the coin they furnish, we must suppose that the coin they have procured, is not in consequence of a loan, but of a credit given them in the place from which the coin is sent: for I never can suppose that any merchant will borrow coin upon a loan, and lie out of so large a capital while he has bank notes in his hand to pay up what he has received. If he has procured this coin upon credit, will not this, when it comes to be replaced, augment the grand balance against the nation in favour of the country or city which granted that credit? And must not that balance be paid by exchangers out of the coin received by the bank? If, therefore, we suppose that the undertaker does not draw out the very coin he had just delivered into the bank, will not exchangers do it for him; will not they be ready with notes, as soon as the coin is lodged in the bank, to draw it out, and send it off, in order to furnish the undertaker with bills to fill up his credit, for the coin he had received from people residing in the place to which the exchangers have sent coin, to be ready to answer their draughts? Does this differ in the least from what is called drawing and redrawing, which is sufficient to ruin any man, and must not a like practice ruin a bank, by raising exchange to a monstrous height?

This being the case, the shortest and the best method of preventing such abuses, is to oblige banks to pay upon demand, in coin or bills, at the option of the holder of the note. This will force them into the method of providing them; to wit, fairly borrowing money from nations to whom we owe, and paying a regular interest for it, without an obligation to refund the capital, until the grand balance shall take a favourable turn; in which case, the banks will regorge with coin drawn from strangers, and these strangers will then find as great an interest in being repaid, as the bank found in borrowing from them, while the balance was in their favour.

We have said, that a statesman should oblige all public banks to pay regularly upon demand, in coin or bills, at the option of the holder of the note. But then he must facilitate to them the means which he has in his power, of providing themselves with the coin, or bills demanded.

For that purpose, he must, first, provide them with a mint, for how, without a mint, can a bank convert into coin the metals it may provide from other countries? Next, he must put that mint under such regulations as to cut off all profit from money-jobbers, who will be ready to draw coin out of the bank the moment they find the least advantage in tampering with it. In order to prevent this abuse, a reasonable rate of coinage should be imposed, according to the principles laid down in the third book; and when banks have occasion to pay a balance out of the nation’s coin, a drawback for part of the coinage should be given them. This drawback will support the value of the coin, and the loss of the remainder will engage them to export bullion preferably to coin, when it is to be found: and if no drawback were given, the coinage would be totally lost to the bank.

When this deduction is given, the coin must be melted down, and stamped in bars at the mint; both in order to prevent frauds in the drawbacks, and to disappoint strangers who receive it at the price of bullion, from gaining the price of coinage when they return it back. And in the last place, all light coin should be banished out of circulation, and made to pass by weight for bullion, at the current price of the market. All banks should both receive and deliver coin by weight, when the sums are so considerable as to require full bags of coin to pay them. It is not here necessary to repeat what has been said upon this subject at so much length in another place.

The method of facilitating to banks the means of providing bills for the payment of foreign balances, is, secondly, to assist them in procuring loans beyond the district of their own circulation. If government shall be satisfied that the intention of demanding such loans, is to enable the bank to interpose their credit in favour of the trade and industry of those who circulate their paper, and who have no way of paying such balances, but with their solid property; in that case, government will, undoubtedly, assist the bank in obtaining loans for so national a purpose, by declaring the security upon which they desire the loan to be good, and by becoming answerable to the public for the solidity of it.

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CHAP. XV. Of subaltern Banks of Circulation, and of their Competition with one another.

We have hitherto treated of the principles which influence national banks of circulation, we now come to examine some peculiarities attending banks of a subaltern nature, which for the most part trust to the national bank for all supplies of coin; and when this resource fails them, they are thereby involved in difficulties which are not easily got the better of. Besides this inconvenience, to which all subaltern banks are subject, they are frequently exposed to competition with one another.

A national bank enjoys such great advantages from the stability of its credit, and the regularity of its operations, that it is not easy for any other private company to establish themselves upon the same solid system.

When any banking company is established, which draws its support from a national bank, the facility of carrying on the business by so great an assistance, naturally engages other companies to imitate their example. From thence arises a competition. All such banks begin to consider the circulation of their own district as their undoubted property, and they look with an eye of jealousy upon every note which does not carry their own mark.

The great point of their ambition is to gain credit with the national bank; and could they obtain of that company to receive their notes, or to give them credit for their draughts, in cases of necessity, they would be at their ease; because the national bank would then be at the whole expence of providing coin and bills, and they would have nothing to think of, but to extend the sphere of their own circulation.

With respect to all these subaltern societies, the national bank will no doubt steer an equal course. I suppose every one to be settled upon good security; without which they do not deserve the name of banks.

In proportion to their stocks, and according to the state of the national balance, they may, as well as any private person, on many occasions, draw considerable supplies of coin from the national bank, without lying under any obligation to it; because when exchange is low, they can realize any part of their stock into coin, out of the national bank, at very little loss, excepting the interest of it: for interest must always be reckoned upon every guinea which lies in their chest.

Did these banks consider one another in a proper light, they must see in an instant that the solidity of every one is equally good; because I now suppose them all standing upon the principles of private, not mercantile credit, as above explained.

What benefit then can they possibly reap from their mutual jealousies, from gathering up each other’s notes, and coming with a run upon one another from time to time? The consequences of this will be, to oblige themselves and others to preserve for domestic circulation a larger quantity of coin than is necessary, and thereby to diminish their own profit: to take up their attention in providing against their own reciprocal attacks, and thereby neglect the providing a supply for that demand which is indispensable; to wit, the payment of the grand balance due to other nations; at which time the resource of the national bank will certainly fail them. The managers of every one of them will pretend that it is they who are saddled with this burden; but the nature of the thing speaks for itself.

Wherever this grand balance is transacted, the exchangers residing in the place will have recourse to the bank there established; and if there be more than one, that which pays with the greatest readiness will have the best credit, the most notes in circulation, and the largest profits upon the whole. If any one is found slow, or difficult in paying its paper, exchangers will be the more punctual in making their demand for payment, and they will even be averse to receiving such notes from their correspondents.

Every man who has occasion for credit from a bank, will apply to that whose notes are the most esteemed. In short, there will be profit, in the main, to the bank which pays the best, although I allow that at particular times there may be some additional inconveniences, unless a regular plan be laid down on the principles above deduced.

This however is a vague reasoning; because the matter of fact is not known. All that can be said with certainty, is, that while no public regulation is made with regard to banking, every one will carry on the trade according to his views of profit; and private animosities between different companies, will only tend to distress the nation and themselves, as experience has, I believe, discovered.

If, as matters stand, a very great inconvenience results to Scotland from the want of a communication of paper credit with England, and if thereby an exchange of 4 and even 5 per cent. has been paid for bills upon London, because all the coin of the country is locked up in banks; I ask what would be the consequence, if banks had their will in banishing from the circulation of their own district, every other notes but their own? In that case, we might, in a short time, find an exchange of 4 and 5 per cent. between Fife and Lothian, between Glasgow and Ayr, and so of the rest. What would then become of manufacturers, who could not dispose of their work at the distance of a few miles, without having recourse to exchangers for their payment? If such an abuse were once allowed to creep in, there would be no other remedy but to destroy banks altogether, and throw the little coin there is into circulation.

On the other hand, when banks are in a good understanding, when they are established on solid principles, when their paper is issued on proper security, the public is safe; and in every little district, under the wings of their own bank, there will arise a set of exchangers, who will give credit to merchants and manufacturers, and who will have recourse to their own bank for the coin or bills necessary for their occasions. This will naturally divide the payment of the grand balance among them, in a due proportion to their circulation.

I shall now consider the principles which may direct a statesman to settle banking upon mortgage on a proper footing, to serve every national purpose.

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CHAP. XVI. Of some Regulations proper to be made with regard to national Banks.

From what has been said, we may conclude, that were a national bank upon mortgage, established on a plan calculated to answer the purposes of the most extensive domestic circulation, it might be regulated in the following manner.

1_mo_, Let a large stock of property, of one species or other, be provided, in order to gain the confidence of the public, and let it be pledged for the payment of all the notes.

2_do_, Let all solid property intended to be melted down into paper money, be first constituted in such a manner as to be easily sold, and in the mean time secured to the company, for their advance, preferably to every other person, and let it be of a revenue fully sufficient to acquit the interest for ever.

3_tio_, The capitals due to the bank must not be demandable by the bank, as long as the interest is regularly paid.

4_to_, Every one who constitutes his property according to the regulations, must be entitled to a proportional credit from them.

5_to_, All bank securities must be pledged in the hands of government for the interest of whatever money the bank may borrow with their consent, beyond the district of their own circulation.

6_to_, Government must support the bank in proportion to the extent of their funds.

7_to_, Let bank notes be payable to bearer, either in coin, or in inland bills to the value, or in a transfer of a corresponding interest at — per cent. all in the option of the holders.

Were such regulations established, the borrowing from banks would become very easy; any man who is master of his property, though incumbred with debts, might put it into bank regulation, might raise upon it what sum he thought fit, with which all his debts might be paid off; he might even give credit upon it to those who otherwise are not in a situation to obtain it: for which credit given, a profit in the rate of interest might be allowed to him. Were a plan concerted consistently with the principles which have suggested this general sketch, all borrowing and lending of money would soon center in the bank. Securities would be easy, and expence greatly avoided.

A national bank, when rightly constituted, may however be safely indulged in more extensive methods of circulating their paper than upon land security. The bank of England is allowed by charter to issue notes for discounting bills of exchange, it may trade in gold and silver, may advance money to government upon the security of taxes imposed and levied within the year. But it is in general debarred commerce, and every precarious object of traffic. The reason is plain. The paper it issues becomes the property of the nation, and may form in a short time the greatest part of the currency of it. In such a case, were the bank exposed to losses by trade, or insolvency of debtors for great sums, the whole credit of the nation might be ruined, and all the lower classes of the manufacturing inhabitants undone, before such a blow could be repaired.

Under proper regulations, bank paper might be made a legal tender in every payment: in which case it is hardly possible that any considerable demand for coin should ever be made upon them, except for the payment of the grand balance.

This national bank may have different offices, in different cities within the kingdom, and these will make subaltern banks both useless and unprofitable. It might even be stipulated, that a certain proportion of bank stock, in the name or for the behoof of any city, should entitle that city to a proportional part of the administration within their own district. As these are only speculations, not plans, I need not set about removing objections, which are constantly many and well grounded, whenever any new establishment or innovation is proposed. All I aim at is to set this principle in a clear light, to wit, that it is the interest of every trading state to have a sufficient quantity of paper, well secured, to circulate through it, so as to facilitate payments every where, and to cut off inland exchanges, which are a great clog upon trade, and are attended with the risk of receiving the paper of people whose credit is but doubtful.

For this purpose, I have proposed that inland bills should be demandable from the bank at par, as well as specie.

It would be an admirable improvement upon this scheme, to make a like regulation as to foreign bills. However, this speculation is reserved for another opportunity. All I shall say, at present, upon that head, is, that as we have seen how the whole national balance must be paid by banks (who circulate paper payable in coin on demand, and who consequently must, on some occasions, draw the metals from abroad for that purpose, in order to fill up the void made by exchangers, who send them out) and it would, I think, be shortning, in some measure, that operation, and be a means, at the same time, of indemnifying the bank in this respect, to regulate matters so, that all foreign exchanges might be transacted there at fixed rates, according to the place where the exchange is to be made, without erecting any monopoly for that purpose in favour of the bank, or depriving any one of the liberty to deal in exchange, who can afford it at more reasonable terms than the bank; but of this more when we come to the doctrine of exchange.

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CHAP. XVII. When and in what case Banks should be obliged to keep open Books.

If no national bank be established under proper regulations, and entire liberty allowed to every one to take up the trade who can issue his notes, I think it would be against all principles of good policy not to oblige such banks to keep open books, to be inspected regularly by some authority or other; in order to see upon what security that paper stands, which is the instrument of commerce, a part of every man’s private property, and which, if any part of it should once fail, either through the knavery, misconduct, or misfortune, of a particular company, would cast a general discredit upon all paper, and be a means of bringing on those calamities which we have so often mentioned.

I know the ordinary objection against this, is, the inconvenience of throwing open the secrets and mysteries of trade. As to the mysteries of trade, this point shall be examined in another place. But here, I say, there is no question of trade in which any risk is implied: and if any one can suppose, that, at any time, the affairs of a bank are in so ticklish a situation as not to bear inspection, that very supposition shews how necessary it is not to permit such a bank to continue this circulation. The only inspection, in which the public is interested, is to know the quantity of notes issued, and the extent and nature of the securities pledged for them. They have no business to examine the state of their cash, or of particular people’s credit. They may be without a shilling in their coffers, and still their paper be as good as if they had a million. Such an inspection, as I propose, would rather confirm than shake their credit, but it would be a means of preventing them from launching out into speculations in matters of commerce, which is not their district; and from gaming with national property.

If it be said, that this inspection would lay open the affairs of many private men, debtors to the bank, I answer in the negative; because no man’s credit is hurt by his having a cash account, and no inspection is requisite, as to the state of that accompt with the bank. The credit may be either quite full, or quite exhausted; this particular interests no body but the parties themselves; but it is essential to know upon what security the credit has been given; because every man who has a note of such a bank in his possession, has a very good title to be informed concerning the security on which it stands.

It is not sufficient to say, that the holder of the note, if he doubts of the security, may demand payment. It is not here the interest of any individual, but that of the public which is attended to: and if, according to the principles of common reason, it be just, that a creditor should have it in his power to watch over the abilities of his debtor, so as to secure his payment; certainly it is equally just, that the public (which I consider here as the creditor) should be made certain, that what is circulating with as great facility as the King’s coin, contains a real value in it. Would it be a good answer from any man who held a piece of false money in his hand, for the use of circulation, to skreen himself, by alleging that if it be false, no body need to take it. It is the right of every man to detect false coin; but it is the right of government only to detect false paper: because law only can authorise such an inquisition. Does not the charter of the bank of England establish this right in government? If the bank be confined to certain particular branches of solid trade, where little risk is incurred, might not government examine, when necessary, whether these regulations have been observed; and how can this be done without such an inspection as is here recommended?

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CHAP. XVIII. Is it the Interest of Banks to grant Credits and Cash Accompts to Exchangers and others, who make a Trade of sending Coin out of the Country?

The answer to this question is very short.

From the principles we have deduced, it is plain, that it is both the office and interest of banks to give credit to all who can give good security for it.

The cause of doubt upon this question, arises only from certain inconveniences which have been of late experienced in Scotland; but which never would have been felt, had banks attended to their true interest, in providing funds to answer the demands of those who are either obliged, or who find an interest in paying off what the nation owes upon the grand balance to foreigners.

To set this matter in a clear light, let me suppose that, some time ago, the banks had at once withdrawn all the credits granted to exchangers; and opened a subscription for a loan of money, equal to what they might estimate the sum borrowed by that set of men within the country, for the sake of carrying on their business.

According to principles, these two operations should go hand in hand: the recalling the credits would, no doubt, have greatly distressed exchangers; but as long as they could find money to borrow from private hands, that inconvenience would have been lessened. Besides, I apprehend that the late custom among exchangers, of borrowing at 4 per cent. owes its existence to the difficulty they felt in obtaining extensive credits from the bank; and if this be the case, then there has been a lucrum cessans to the bank of 5 per cent. upon the amount of all these borrowings; because exchangers, I apprehend, would prefer a credit from the bank at 5 per cent. to a loan at 4 per cent. payable on demand, according to the occasions of those who keep their money with them.

The most effectual method, therefore, to hurt exchangers, would have been to have recalled all their credits, and offered to borrow, upon the same terms, what was lent to them.

The execution of such a plan would, I think, have been, 1. diametrically opposite to the interest of the banks; 2. would have occasioned such a run upon exchangers, as to throw them into great distress; and 3. would have ended in the total ruin of the trade of Scotland.

That such a plan is diametrically opposite to all principles of banking, I suppose, is by this time sufficiently understood.

That it would have occasioned a run upon exchangers, is pretty certain: because however good their credit might be, it must be acknowledged to be inferior to that of the banks; and therefore no body would prefer them for debtors, to the bank, upon the same terms.

The third consequence is as evident, upon a short reflection, as the other two. The run upon the exchangers would have obliged them to make a call upon all the merchants and dealers in Scotland, to whom they gave credit: for which purpose, and for which alone, they find an interest in borrowing at so high an interest as 4 per cent.

The call, then, made by the exchangers upon their debtors, is neither more or less than a call upon the money employed in the trade of Scotland.

Now we have said, that whoever owes must pay. The merchants of Scotland owe to exchangers; the latter are pressed by their creditors, and must pay with what they have, which consists in money only: when that is exhausted, they must shut up shop. They again call upon the merchants, who must pay with what they have. This consists in goods, and in the manufactures of Scotland; and these they must sell at any price. There may not be time sufficient to export with advantage. To whom then must they sell? To people within the country, who have no money to buy with; because credit is withheld by that body which only can give it. I conclude with the old saying of the law,

Unum quodque eodem modo solvitur quo colligatum est.

The best method to establish credit in an industrious nation, is a bank properly regulated: and the best methods to ruin it effectually, when established, are the inconsistent operations of such a bank.

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CHAP. XIX. Application of the Principles above deduced, towards forming the Policy of Circulation.

From the principles above deduced, there arise three principal objects of attention.

The first, the circulation of paper for domestic uses.

The second, the method of providing coin for that purpose.

The third, the method of paying foreign balances.

These three objects are absolutely different in their nature, and they are influenced by different principles. The consequence of blending them together, is to render the subject, which is abundantly intricate in its own nature, still more dark and perplexed. What is to follow has no relation to any plan proposed for execution; it is only intended as a farther illustration of the general principles which influence this branch of my subject.

1_mo_, As to the circulation of paper for domestic use.

It has been said, that the great utility of banks of circulation upon mortgage, was to facilitate the melting down of solid property; in order to enable every one who has property, to circulate the capital of it for the advancement of industry.

For this purpose he comes to a bank, pledges the capital he wants to melt down, and receives for his obligation, bearing interest, paper money which bears none.

This paper money, I suppose to be as solidly secured as the principles of private credit can make it. I suppose the bank to be established by authority, according to the regulations already mentioned, and the notes made a legal tender in every payment of domestic debts; by which I understand debts payable within the country.

From these data, I say, that the regular method by which the bank should acquit the obligation in the notes, is by restoring the security granted at issuing the notes, if they be returned by the debtor in it; or by a transfer of a sum of interest equivalent to the notes, if they are presented by any other. All farther obligations laid upon banks to pay in coin, or inland bills, is only an equivalent expected from them in lieu of their great profits[12].

Footnote 12:

It must here be observed, that in every country where there is a national coin established, it is absolutely necessary to connect with it the denominations of the paper; in order to affix a determinate value to these denominations. This may easily be done without implying, as at present, an obligation on the bank to realize into coin every bit of paper in circulation.

The interest, therefore, of the credits given by the bank, may be demandable from the debtors in coin; and the transfers of interest made by the bank, to those who bring in notes for payment, may also be demandable in coin from the bank.

These payments will bear a small proportion to the paper in circulation, as interest must be very low; and coming at fixed terms of payment, provision will easily be made for them.

This regulation will support the coin of the country, and as the interest of all the paper becomes demandable in coin, the intrinsic value of the interest will effectually support the value of the capital.

When paper issued for domestic circulation returns to a bank, were it not for the profits on their trade, I see no reason why a bank should pay in any other species of property than what it received; and if, by the interest they receive for their notes, they are abundantly indemnified for all the difference between paying in coin and in transfer, I think the public would be a gainer to dispense with that obligation in lieu of an abatement of interest; which would be an advantage to commerce, not to be counterbalanced by the other.

Farther, the business of providing coin is totally different from that of supporting domestic circulation: it is founded on different principles: it requires men of a particular genius to conduct it: the difficulties to be met with are not constant; and therefore cannot form a regular branch of bank administration.

2_do_, The method of providing coin for domestic circulation is the business of mints, not of banks.

I have, in the third book, treated very fully of the doctrine of coin, and of mints. I have shewn the difference between money, which is the scale for reckoning value, and coin, which is certain denominations of money, realized in a proportional weight of the precious metals. I have shewn how necessary a thing it was to impose the price of coinage upon the metals manufactured into coin: and I have said, that it was inconsistent with all principles, to allege that the metals, when coined, should thereby acquire no additional value.

The expence, therefore, of providing the metals should be thrown upon those who want coin; and the mint should be obliged to convert gold and silver into coin, upon the demander’s paying the coinage.

This coin loaded with the price of coinage, never will be sent abroad to pay a foreign balance; never will be locked up in banks, which will have little occasion for it. It will, therefore, remain in circulation, and serve those purposes for which the inhabitants think fit to employ it.

This coin, I say, never will be exported, as long as any uncoined metals can be found in the country: and if upon a national distress it is thought fit to facilitate the exportation of it, the state may (as we observed above) appoint the mint to receive it back, in order to melt it down into ingots, stamped with the mark of sterling, repaying to the bearer —— per cent. of the coinage.

3_tio_, The trade of paying off foreign balances will then become a particular branch of business: of which we shall treat more at large, when we come to examine the principles of exchange.

All that is necessary to be said in this place, is to recal the principle we have mentioned above, viz. that when a nation cannot pay in her metals, manufactures, and natural produce, what she owes to strangers, she must pay in her solid property; that is, she must mortgage the revenue of such property, for a capital borrowed out of the country, which capital she must employ for the payment of her foreign debts.

This operation then should be performed by a regular and systematic plan.

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CHAP. XX. Objections to this Doctrine.

That bank notes can never be received as specie, but from a persuasion that they may be exchanged for it on demand.

To this I answer, that it is sufficient they be received as value; and that they answer every purpose in carrying on alienation. The use of money is to keep the reckoning between parties, who are solvendo; the use of specie or coin is to avoid the inconvenience of giving credit to persons who perhaps may not be so.

When merchants make delivery in accompt, they then give credit to their customers: when they sell for bank bills, they give credit to the bank: when they are paid in coin, they give credit to no body; because they receive the real value in the coin. Where then is the difference between receiving the real value, and receiving an obligation for it, concerning the validity of which every one in the country is perfectly satisfied?

Is there a merchant, in any country in the world, who will sell one farthing upon an hundred pounds cheaper to a person who pays in coin, than to another who pays in good paper; unless the extrinsic circumstances of the country should, at that time, give an advanced price to the metal of which the coin is made.

Money, we have said, ought to be invariable in its value: coin never can be so, because it is both money and merchandize: money, with respect to the denomination it carries by law; merchandize, with respect to the metal it is made of.

But it is urged, that if I have coin I may pay any where within the commercial world, at the expence of transportation, and insurance. I grant this to be true.

But I answer, that the principal use of coin, is, not to send it out of the country; but to keep accompts clear among inhabitants within the country. If there be a variation in the value of coin, according to circumstances, that variation must affect the inhabitants in their transactions. No one can gain upon this coin, without supposing a relative loss to some other, whether they perceive it or not. Must not this disturb all reckoning? Must it not disturb prices? Since at different times, I may be paying the same denominations of coin for the same commodity; and yet be paying, really, more value at one time than at another. Is not then the most invariable money the best calculated for the interest of trade, and prosperity of manufactures? Whence arise complaints against paper money, and regrets for want of coin? They issue from those who both wish to profit of the rising value of the metals contained in the coin, and who endeavour to persuade the public, that its interest, and not their own, is their object.

What a trifle is a foreign balance, let it be ever so great, compared with the whole alienations of a country! Is it reasonable to disturb the harmony of all domestic dealings, in order to furnish an opportunity to a few clear-sighted people, who can, upon some occasions, profit of the fluctuating value of the substance of which the coin is composed, to the prejudice of the ignorant? If the country owes a balance to other nations, let it be paid: nothing so just; nothing so essential to the interest of the country which is the debtor. If the precious metals are the most proper vehicles, as I may say, for conveying this value, let them be procured and sent off; but never let us say, that because some of our money may be made of that metal, that all our money should be made of it; in order that those who transact the balance may have an opportunity of sending our metals away with greater ease, and thereby of depriving us of the means of carrying on alienations among ourselves. Let every one that has coin send it away: nothing can be more just; nothing more consistent with principles: but let him send it away as a manufacture; carrying in its bosom the price of making it, which he has paid, and for which his foreign creditors will make him no allowance.

Exchangers run to the coin of the nation, for paying, with the least expence to themselves, the balance they are about to transact. When that resource is cut off by the imposition of coinage, the nation will preserve at least her darling specie; and then exchangers will be obliged, by the best of all compulsions, their own interest, to think of other expedients; bullion, manufactures, and natural produce. And when all these come to fail, a regular plan must be laid down, and authorised by government, for obtaining credit in other countries, by mortgaging the revenue of the solid property of the kingdom; according to the principles we shall discover when we come to treat of exchange.

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CHAP. XXI. How by a return of a favourable Balance the Bank may be enabled to pay off the Debts due to Foreigners, and thus deliver the Nation from that Burthen.

We have said, that the banks in contracting debts, and mortgaging the property of Scotland to strangers, for the payment of a grand balance, really acted as the guardians of the public, by interposing their credit, and by constituting themselves as debtors for the whole; taking for their relief, proportional securities upon the effects of individuals.

We have also pointed out how, by this operation, the mass of bank securities comes to be greatly augmented.

Before the payment of any balance for the behoof of Scotland, the securities in the hands of the bank can only be equal to the notes in domestic circulation, and accumulated profits thereon. Let this be called (A). In proportion as these notes come back upon the bank, in a demand for bills to pay balances, in the same proportion is there a sum of securities added to the former mass (granted upon new credits given for filling up the void thereby occasioned to circulation) which quantity I shall call (B).

(A) then represents the securities equivalent to the notes in circulation.

(B) represents the securities equivalent to the debts contracted by the bank in favour of strangers.

Now let us suppose trade to become favourable; or that the interest of the money, which the natives had sent abroad, to invest in foreign countries, begins to flow back: what will be the effect of this?

I say, that this balance will be paid to Scotland, either in coin, or in the metals, or in produce, or in manufactures, or in bills.

In every case, it must be supposed to be beyond the consumption of Scotland; otherwise it will not be a balance in their favour. Whatever part of it, therefore, proves to be beyond the consumption of Scotland, will be turned into money. This money must either consist in the metals, or in foreign bills. If it consist in the metals, it will, if coined, fill up, pro tanto, a part of circulation; this will make a proportional part of bank paper return upon the bank, and extinguish a proportional part of their securities; which we have called (A). But then there will be more coin in circulation than formerly; consequently, more coin will enter into payments made to the bank than formerly. But we must suppose, that before this favourable turn of commerce, there was coin enough both in the bank and in the country for the uses of domestic circulation; consequently, the bank will send off this superfluity of coin, and with it they will refund a part of the debt they formerly contracted.

Through all this chain of reasoning, we must always suppose the money in circulation to be a determinate sum; otherwise the superadding this foreign balance in coin will not occasion, as we have said, a return of a proportional part of the bank paper.

In the next place, let us suppose this favourable balance to consist in foreign bills, upon London, Amsterdam, &c. These will be discounted by the bank, and notes issued for them. The bills will be sent off by the bank, in order still to extinguish a part of what is owing to foreigners. These notes, again, being superfluous to circulation, which we suppose to be full, will return upon the bank and still diminish the mass of (A).

By these operations we see how (A) will be constantly diminishing; but then in the same proportion we see how the mass of foreign debts will also be diminishing: consequently (B), which was engaged for them, will be returning to be the free property of the bank; and as we suppose no variation upon the sum in circulation, we may consider this as a sort of conversion of (B) into (A), and when all (B) shall be thus converted into (A), then the debt formerly contracted by the bank, in favour of Scotland, will be totally paid off by the same method (only inverting the operations) by which it was contracted.

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CHAP. XXII. Of Banks of Circulation established on mercantile Credit.

I have examined, with all the care I am capable of, the nature of banks calculated for the melting down of solid property, and converting it into paper for the use of circulation.

The nature of such banks is but little known in countries where they have not been established, and a distinct account of them may suggest hints, which in time may prove useful.

People who do not employ their thoughts on the theory of trade and credit, are apt to overlook objects of real utility; and those who do, have seldom the opportunity of being informed of the customs of different nations. Were my experience greater, or had I more opportunities to dive into the recesses of this great object, the work I now present to the public would better deserve its attention.

I now proceed to a deduction of the principles upon which are founded those banks which are principally calculated for the use of commerce; and as the ground-work of my inquiry, I shall trace some of the principal operations of the bank of England.

The establishment of this great company was formed about the year 1694. Government at that time having great occasion for money, a set of men was found who lent to it about 1,200,000_l_. sterling, at 8 per cent. for the exclusive privilege of banking for 13 years; with this additional clause, that 4000_l._ sterling, per annum, should be given them to defray the expence of the undertaking. This sum of 1,200,000_l._ sterling, was the original bank stock. It has been since increased to 11,000,000_l._ by farther loans to government, for the prolongation of their privileges; as has been taken notice of in the 16th chapter of the second part.

This stock, as in banks of circulation upon mortgage, is only to be considered as a subsidiary security to the public for the notes they issue: were it the principal and only security for their paper, this bank would then be founded on the principle of public, not of mercantile credit; under which last denomination we are going to point out in what the nature of it differs from those we have already explained.

It is a rule with the bank of England to issue no notes upon mortgage, permanent loan, or personal security. The principal branches of their business may be comprehended under four articles, viz. 1. The circulation of the trade of London: 2. The exchequer business of Great Britain: 3. The paying the interest of all the funds transferable at the bank: 4. Their trade in gold and silver. I shall now shortly explain the nature of these four great operations; and first as to the circulation of the trade of London.

When we speak of the circulation of trade, we understand the circulation of money paid on the account of trade.

The great occupation of the London merchants engages them to simplify their business as much as possible. For this, they commit to brokers every operation which requires no peculiar talents or ingenuity in the merchant himself; and, for a like reason, they commit to the bank and private bankers the care of their cash.

A Scots merchant begins by drawing money from the bank, for which he pays interest: a London merchant begins by putting money into the bank, for which he draws no interest at all.

A London merchant, therefore, can give no order upon the bank, unless at a time when he has money lodged in it.

If he has occasion for money at any time, he sends to the bank the bills he has, before they become due, and the bank discounts them at certain rates, according to their nature.

If it be a foreign bill, the bank in discounting it, retains of the sum, at the rate of 4 per cent. per annum, for the time the bill has to run; but if the bill be at a longer day than 60 days, they will not discount it. So in this case, the merchant must keep his bill until it is within 60 days of the term of payment.

The reason for this is evident: the security upon which such bills stand, is purely mercantile. The nearer, therefore, the payment is, the less risk the bank incurs from the failure of those who are bound in it.

The intention of this operation of discounting bills, is plainly to employ the cash in the bank in a way to draw an interest for it; but as merchants allow their money to lie dead for as short a time as they possibly can, the bank must have quick returns for what they advance upon discount, in order to be constantly ready to answer all demands. This is no loss to the bank, and a prodigious advantage to trade, as I shall briefly explain.

The bank is constantly receiving cash from every person who keeps their cash with it. This occasions a constant fluctuation of payments, which of course must leave at all times a considerable sum of other people’s money in the bank; because it never is in advance to any one.

By long practice in the trade, this sum of money becomes determinate: let us call it the average-money in the hands of the bank. It is then with this average-money alone, that the bank can discount bills. Now if the trade of London does afford bills to be discounted at different dates within 60 days, sufficient to absorb the whole average-money of the bank, appropriated for discounting; this branch of business would not go forward with the celerity required for the trade of London, did the bank indulge merchants so far as to discount at a longer day.

From this we learn another reason why the bank of England discounts no bill which has more than 60 days to run. The first, mentioned already, is for the greater security of payment; and the second, which we now discover, is in order to be able to discount more bills than otherwise they could do, did they discount at a longer day.

As I am here upon the subject of discounting bills of exchange by the bank of England, an operation it has in common with all the private bankers in the capital, I must answer a question I have frequently heard proposed.

How it happens, that in a city of so great trade as London, it is possible that people should be found even among merchants, who allow their money to remain in the hands of bankers without interest; when in Scotland, a place of so little trade, interest may always be got for money for the shortest time?

The answer to this question is to be derived from the very principles of trade itself.

The money which merchants have either in the hands of the bank, or of bankers, though very considerable at all times, is in perpetual fluctuation: it cannot then be lent to any but a banker, who would consent to pay interest for the sums in hand. But no such banker can be found, nor ever will be found, until all the bankers in London consent to such a regulation. The reason is plain. One principal use the bankers make of the average-money in their hands, is the discounting of bills. Who then could pay interest for money, and discount, in competition with others of the same trade, who have it for nothing?

But suppose the bank, and all the bankers in town, should come to the resolution of giving interest for the money in their hands, what would be the consequence?

I answer, that upon such an alteration, discount would rise above the present rates, to the great prejudice of the trade of the nation; and bankers would lend the money in their hands upon a more precarious security for the sake of a higher interest.

All the landed men who reside in London, and many other wealthy people, not concerned in trade, constantly keep their money either in the bank, or in some banker’s hand, without interest: this enables bankers in general to discount foreign bills at 4 per cent. as has been said, even when the rate of interest is rather above that standard. This is, as it were, a contribution from the rich and idle, in favour of the trade of the nation.

Let, therefore, gentlemen who have much idle money, think of any other expedient than that of obtaining interest for it, from those who discount bills in London. Not one of them can afford to do it, and thrive by his business; and the hurt which would result to trade in general, will constantly be a sufficient bar against a general resolution for that purpose.

What has been said, will, I hope, prove satisfactory as to the resolution of the question above proposed, so far as regards London. It remains to be answered, how those who supply the place of bankers in Scotland, and even the banks themselves, can afford to pay interest for any sum put into their hands for a short time.

I answer, that as to the Scotch exchangers, as we have called them, the profits on their trade admit of borrowing money at interest, which that of the bank of England and private bankers cannot do. If these last can gain 4 or 5 per cent. by discounting of bills, it is all they can honestly expect: every other employment of the money in their hands is precarious, either as to the security or promptitude of calling it in, to answer the demands which are made upon them.

As to the Scotch banks, we have seen how directly contrary to all principles it is, to borrow money in Scotland. How it diminishes the profits upon their own trade, and hurts the circulation of the country; but although it diminishes their profit, it carries along with it no positive loss to them, as would be the case with a London banker, who would pay interest for all the money in his hands, when he never can draw any back, except for that part which we have called the average.

Every London banker is obliged to have a certain sum of cash constantly in his chest, the interest of which would be all lost, did he pay for it: whereas the exchangers in Scotland never have a shilling by them; and when any demand is made upon them, they draw the money from the banks, in consequence of their credit by cash accompts.

Besides foreign bills, which the bank of England discounts at 4 per cent. they also discount inland bills, and notes of hand between merchants in London, at 5 per cent.

The inland bills to be discounted at the bank must all be payable in London. The bank calls in no money from any distant quarter of the kingdom.

As the discounting of notes of hand between London merchants might operate the same effect, as if the bank should advance them money upon personal security, in case the notes were drawn for obtaining credit, in place of paying money really due between the merchants, in the course of business, the clerks of the bank keep a watchful eye over this branch of management, and, by examining the reciprocal draughts of merchants between themselves, they easily acquire a knowledge of the state of their affairs, and are thereby enabled to judge how far it is expedient to launch out in discounting either the notes or bills wherein they are concerned.

I shall not pretend to assign a reason why, in the price of discount, the bank makes a difference of 1 per cent. between foreign and inland bills of exchange. It may either be an indulgence and encouragement to foreign trade; or it may be upon the consideration of the better security of foreign bills, which commonly pass through several indorsations before they are offered to be discounted at the bank.

I come next to the circulation between the bank and the exchequer.

The bank of England is to the exchequer, what a private person’s banker is to him. It receives the cash of the exchequer, and answers its demands.

Cash comes to the exchequer from the amount of taxes. The two great branches of which are the excise and customs. To explain this operation with the more distinctness, I shall take the example of the excise.

The excise is computed to bring in annually from London, and the fifty two collections over all England, nett into the exchequer, above four and a half millions sterling.

The fifty two collectors send the amount of their collections to London eight times a year, almost entirely in bills. As the same may be said of the remittances of all the other taxes, we may from this circumstance observe by the way, that London alone must constantly owe to the country of England a sum equal to all the bills drawn upon it; that is to say, to all the taxes which the country pays: a circumstance not to be overlooked, from which many things may be learned, as will be taken notice of in the proper place.

The bills sent by the fifty two collectors, are drawn payable to the commissioners of excise; they indorse them to the receiver general; he carries them to the bank as they fall due, and gets a receipt for the amount; this receipt he carries to the exchequer, who charge it in their account with the bank, and deliver tallies to the receiver general for the amount of his payments; these tallies he delivers to the commissioners of excise, who enter them in their book of tallies. This operation is performed once every week, and serves as a discharge from the commissioners to the receiver general.

The bank, again, keeps an account with the exchequer, which is settled once every day, by two clerks, who go from the bank to the exchequer for that purpose. When coin is wanted by the exchequer, for payments where bank notes will not answer, the coin is furnished by the bank; when paper will serve the purpose, paper is issued.

Besides this operation in the receipt of taxes, the bank advances to government, that is to the exchequer, the amount of the land or other taxes imposed, which are to be levied within the year. This we see is a loan upon government security for a short term, quite consistent with the principles upon which the bank is established. The large sums the bank is constantly receiving of public money, and the great assistance it obtains from thence in carrying on the other branches of their trade, enable it at present to make advances of money to government at 3 per cent. It observes the same rule with respect to the great companies of the East Indies, and South Sea, for the same reason: but no advances are made to private people; and in discounting of bills and notes of hand, the regulations above mentioned are adhered to.

Thus the whole amount of taxes is poured into the bank, in the manner we have been describing.

The bank also keeps the transfer books of all the funds negotiated at the bank; and out of the public money in its hand, it pays the interest of those debts, for which government allows to the bank a sum proportionate to the expence of that branch of management.

When the bank, as a company, lends to government upon a permanent fund, the capital whereof is not demandable, this operation is foreign to their business as a bank, and is conducted by the company, as an article of management of their private property.

Let us now examine by what channels their notes enter into circulation, and the security upon which they stand.

When issued in the discount of bills, they stand upon the principles of mercantile credit, and depend upon the goodness of the bills discounted. When issued upon the faith of taxes to be paid within the year, they stand upon the security of that payment, which is of a very complex nature, as any one may perceive. As long as the inhabitants of England consume exciseable goods, the excise will be paid: as long as trade goes on, customs will be paid: and as long as government subsists, the collateral security of the state will serve to make up all deficiencies in the amount of taxes. No security, therefore, can be better than the notes of the bank of England, while government subsists. The losses that great company meet with from bad debts, I am informed, are very inconsiderable.

The greatest risk the bank runs, is in discounting bad bills; but by the extent of their business in this branch, and by circulating the cash of all the merchants who keep accounts with them, they acquire so perfect a knowledge of the state of their affairs, that it rarely happens that any one can fail for very considerable sums, without the bank’s having a previous notice of it. A sudden loss may no doubt happen, without a possibility of being foreseen; but the matter of fact proving that their losses upon bad bills are inconsiderable, we may thence infer, that there is but little mystery to the bank, with regard to the credit of London merchants.

I come now to the last branch of their management, to wit, their trade in gold and silver.

For the circulation of bank notes, coin is necessary. We have seen, in treating of the Scotch banks, how coin is brought in: to wit, in consequence of all the payments made to the bank, in which there must be a proportion of coin equal to what is found in common circulation. What is not paid in coin, comes in, in their own notes, which are thereby taken out of the circle; and consequently make place for a subsequent supply, which issues in the manner we have described.

In times of peace, and a favourable balance of trade, the bank suffers little by the obligation it is under to pay in coin, except so far as the great confusion of the present currency affords an occasion to money-jobbers to melt down the new guineas. The extent of this traffic I am no judge of, and the bank no doubt has an interest in preventing it as far as the laws have provided a remedy against it.

But when large payments are to be made abroad, the distress of the bank is no doubt very great.

In Scotland, the banks, upon such occasions, are totally drained of coin. They have no market for the metals; because they have no mint to manufacture them into coin. It is different with respect to the bank of England; their distress proceeds from another cause.

The exportation of the heavy guineas in time of war, and of a wrong balance upon the trade of England, leaves circulation provided with a light currency, in which the bank is obliged to pay their notes; and the intrinsic value of the gold in which they pay, regulates the price of the metals they are obliged to buy at market. If they provide them themselves from abroad, they must pay the price of them in bills of exchange. But then the lightness of the currency at home, sinks the value of the pound sterling, as it raises the value of the ounce of gold and silver. So the only considerable loss they incur, is in providing the metals, which must ever be considerable, so long as the old guineas remain in circulation.

The loss upon coining silver is still greater than upon gold; because, besides the loss incurred by reason of the lightness of the gold, the metals in the silver and gold coin of Great Britain, are not proportional to the value they bear in the London market, where they have been bought, as has been sufficiently explained already in another place[13].

Footnote 13:

See Book III. Chap. 21. Quest. 7.

It is with great diffidence that I propose an expedient to a company so knowing in the arts and science of trade, for preventing, in a great measure, this loss in providing the metals for the use of circulation. The bank is directed by long experience, and by a knowledge of many facts and circumstances hid from me; and which, therefore, I cannot combine into a theory founded chiefly upon reason.

The expedient I propose has been pointed out in the preceeding parts of this inquiry, and I only recapitulate it briefly in this place, to recal it to mind while we are on the subject of the bank of England.

First, then, while the coin is of unequal weight, the value of the currency never can be permanently the same. Did the bank seriously set about forming a plan for the reformation of the coin, I have no doubt but government, as well as the voice of the nation, would go along with it in forwarding the execution of so noble a design.

The second step I would recommend, is that government should enable the bank to establish a fund in Holland, Antwerp, Hamburg, and perhaps at Cadiz and Lisbon, for borrowing (though at a high interest) sums of money equal to what may be due by England to the continent upon certain emergencies.

I cannot pretend to lay down any plan for this operation; but I proceed upon this principle: that if on like occasions the British government can find credit to borrow so large sums for the uses of war, at a very moderate interest, surely the bank of England may imitate her example for the uses of trade; and had she a credit abroad, upon which she could draw, I think it must follow, that the coin of the nation might be kept at home.

I have been an eye witness to large sums in new English guineas thrown into the melting pots of the Dutch mints, for the small profit of less than 1 per cent. gained by coining them into ducats. A small duty imposed upon coinage in the English mint, would prevent this practice abroad; and then British coin would come safe back again, upon every return of a favourable balance on their trade. At present it comes home in bullion, which the bank must buy dear; the state must coin at a considerable expence; and the bank after all must give it to circulation at the mint price, which is many per cent. below prime cost, as matters have stood for several years.

From this review of the constitution of the bank of England, and of the principles upon which it is founded, we may discover how impossible it is, that banks upon mortgage and private credit, can ever receive any considerable assistance from it; and how groundless all insinuations concerning its jealousy of such companies must be.

A more natural object of its jealousy is that of the London bankers, who carry on a trade similar to its own, in many respects, and who, in the course of their business, draw from it very large quantities of coin.

This, however, occasions no ill will on the part of the bank. The trade of London requires the assistance of all the bankers there, as well as of the bank. Were it otherwise, the bank, by discounting bills at a less profit, might soon oblige them to shut up shop. In this view of the matter, the drawing coin from the bank cannot be prevented.

The bankers call for no more than their business requires. Could the bank, therefore, circulate the whole trade of London, the consequence would be, to issue as much coin as at present: and the coin which issues from bankers, like to that which issues from the bank, if it be for the uses of domestic circulation, returns to the bank in proportion as it issues: and if it be for payment of a foreign balance, the bank knows well that the expence of providing for that, must land upon it, in spite of every method to prevent it.

I must now explain the difference between the effects produced upon the circulation of coin, by the operations of banks established upon mortgage and private credit, and by those of the bank of England, which we have said to be established upon mercantile security.

The consequence of a bank upon mortgage, is to fill the nation with paper money, and to reduce the quantity of coin to the lowest sum possible. For the truth of this proposition, I appeal to the experience of Scotland, and of Rome, where banks upon mortgage, and moveable pledges, are found established. From these facts, and from the principles of their constitution, which is to melt down property into money, it follows, that when the credit of such money is well established, the coin, which is the money of the world, will be employed in trading with the world, and the paper, which is the money of the society, will be employed in trading with the society.

The consequence of this, is, that when the balance of trade runs against a country where banks upon mortgage are established, the coin first goes out; and when, by borrowing, it can be brought back, the interest paid for the coin borrowed, adds an additional balance against the country, until the whole revenue of it becomes the property of other nations. From this we may conclude, that the establishment of such banks is as dangerous a weapon in the hands of an idle nation, as an extensive credit is to the family of a young spendthrift.

But let us consider the consequences of such banks to an industrious people, who preserve, upon the average of their trade, a favourable balance with other nations.

The coin, then, goes out to return, and serves as a check upon the course of exchange. I here suppose proper regulations in the mint, and an entire liberty to export coin. Permitting the exportation of coin where you have a mint, for paper to supply its place, and a favourable balance on your trade to bring it back, is like establishing two shops for the course of exchange. If the exchanger will not serve trade at the price of transportation and insurance, the coin will do it for him.

In such a country, a bank, properly established, will find great profit upon the interest of their notes, notwithstanding of the obligation to provide, at all times, the quantity of coin necessary for circulation. All the great objects of trade will then be fulfilled; the rest must be left to the operation of political causes.

If the balance of the trade of such a country should have the effect of bringing in an addition of coin, which, because of the paper, would become unnecessary for circulation; this coin, or the value of it, will either be added to their stock in trade, or will be lent to other nations. This is the case of the Swiss: they are an industrious and a frugal people; they receive annually from their trade, and from the service of their citizens in many countries in Europe, a constant addition to their wealth, more than their trade demands, which they lend to their neighbours; by these means they increase the revenue of the society; and this increase has effects almost similar to an extension of their territory; because it is a means of increasing their population beyond the proportion of the natural produce of their lands; and the food they import from Germany and other countries, is paid with the money which arises from the interest of what they have lent abroad. All these operations are the consequences of credit and circulation.

In a country where a mercantile bank is established, the melting down of property is greatly circumscribed; and consequently coin becomes more necessary.

We have often said, that a circulating value (money) must constantly bear a proportion to alienation. Circumstances will determine what proportion of coin and what proportion of paper will be necessary for carrying it on. These circumstances, under banks of circulation upon mortgage, multiply paper so much that little coin is required.

Let us now examine how far the paper of a mercantile bank, like that of England, tends to supply the demand of circulation.

Were no bank established at London, all bills would be paid, or discounted in coin.

The bank, therefore, melts down into paper money all the bills discounted by them, and throws it into circulation.

It also melts down into paper all the sums it advances either to government, or to the great trading companies. In this respect it acts upon the principle of banks upon mortgage.

It also melts down into paper all the interest upon the public funds discounted at the bank. All this sum of paper issues from the bank into the city of London, and proportionally supplies the circulation of that great capital.

Let us next examine how this paper can find its way into the country of England, there to supply the use of coin.

The whole consumption of London for meat, beer, fire, and an infinity of articles of manufacture for domestic use and foreign exportation, comes from the country of England.

Did the country owe nothing to London, the sums due for those commodities would be sent into the country in the current circulation of London, which, by what we have seen, absorbs a very large quantity of paper.

But we have said above, that the whole amount of taxes, almost, is remitted to London in bills: this could not be the case, were not the capital constantly indebted to the country. This circumstance confines the circulation of bank notes chiefly to London, and some other cities, to which the inhabitants of London resort, and whither they carry in their pockets the money of the capital, viz. bank notes. For these reasons, bank notes can never be common in the country: and if, at any time, a scarcity of currency there, proves hurtful to industry, the defect cannot be remedied but by establishing banks of circulation upon mortgage in the principal towns of England.

It may be here objected that such a regulation in England, where there is already so great a bank settled on different principles, might draw along with it the following hurtful consequences, viz.

1_mo_, By multiplying the circulation of paper it would send off the coin.

2_do_, The taxes would be paid in this paper, which could not be received at the bank of England, and that would throw the whole nation into confusion.

To which I answer, 1. That if the coin were sent off, it would return, as has been said, while the trade of England flourishes: and 2. That this new bank paper coming in place of the coin, would no more be sent to London than coin is sent now. The debts due by the country for taxes, would be compensated by the reciprocal debts due by London for subsistence, &c. and the compensation would go on as at present by bills: but were the case otherwise, and did a change of circumstances oblige the country to make delivery in coin to London, the holders of the country notes would constantly, as is the case in Scotland, have recourse to the bank established in the district, for the coin wanted to be sent to London.

When I accidentally, as at present, happen to apply a principle to a particular case, whereby an innovation is implied, I constantly fear a secret rebuke from many impatient readers. I therefore beg a little indulgence upon account of my good intention, which is only to support ideas to be approved of, or rejected by those who have the capacity to form plans upon them, and power to put them in execution.

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CHAP. XXIII. _Of the first Establishment of Mr. Law’s Bank in France, in the Year 1716._

In deducing the principles of credit, I have it chiefly in view, to set in a fair light, the security upon which paper-money is established: and as I imagine, this important branch of my subject will still be rendered more intelligible, by an example of the abuse to which this great engine of commerce is exposed, I now propose to give my reader a short account of the famous bank of circulation first established in France by Mr. Law; but afterwards prostituted (whether by design, or by fatality, I shall not here determine) to serve the worst of purposes; the defrauding the creditors of the state, and a multitude of private persons.

So dreadful a calamity brought upon that nation, by the abuse of paper credit, may be a warning to all states to beware of the like. The best way to guard against it, is to be apprised of the delusion of it, and to see through the springs and motives by which the Missisippi bank was conducted.

After the death of the late King of France, Louis XIV. the debts contracted by that Monarch were found to extend to 2000 millions of livres, that is, to upwards of 140 millions sterling.

It was proposed to the Duke of Orleans, regent of the kingdom, to expunge the debts by a total bankruptcy. This proposal he rejected nobly; and instead of it, established a commission (called the Visa) to inquire into the claims of such of the nation’s creditors as were not then properly liquidated, nor secured by the appropriation of any fund for the payment of the interest.

In the course of this commission, many exorbitant frauds were discovered; by which it appeared, that vast sums of debt had been contracted, for no adequate value paid to the King.

After many arbitrary proceedings, this commission threw the King’s debts, at last, into a kind of order.

Those formerly provided for were all put at 4 per cent. The creditors to the amount of six hundred millions, which had not been liquidated, nor provided for, had their claims reduced, by the commission, to two hundred and fifty millions; for which they obtained notes of state, (Billets d’etat, as they were called) bearing an interest of 4 per cent. also.

These operations performed, the total debts of the late King were reduced to the sum above mentioned; to wit, two thousand millions; bearing an interest of 4 per cent. or eighty millions per annum.

From the necessities of government, and the distressed situation of the kingdom, this interest was ill paid: and there hardly remained, out of an ill paid revenue, wherewith to defray the expence of the civil government.

About this time Mr. Law presented to the Regent the plan of a bank of circulation.

For the better understanding this affair of Mr. Law’s bank, and the views he had in establishing it at that time, I must give a short account of the most material variations of the French coin, before and after the King’s death, 1st September 1715; which I shall make as short as possible, consistently with perspicuity.

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CHAP. XXIV. Account of the variations of the French coin, some time before and after the death of Louis XIV.

In 1709, there was a new general coinage in France; by which operation the King gained 231⁄13 per cent. upon all the specie coined. (Dutot, vol. i. p. 104.)

Out of the marc of standard gold were coined 30 louis d’ors, of 20 livres denomination each. Out of the marc of standard silver, 8 crowns, of 5 livres denomination each: so that the silver was put at 40 livres the marc.—But,

By edict of the month of September 1713, the old King appointed a diminution of the denomination of silver and gold coins; by which, after eleven successive changes, the coin of France was ordered to be brought down, from 40 livres the marc, to 28: so that the 8 crowns, which were called 40 livres in the month of September 1713, by the 2d day of September 1715, (the day after the King’s death) were to be called only 28 livres. I say called, because certainly the crowns had suffered no variation but in their name.

On the 13th of August 1715, (a few days before the King’s death) he issued a declaration; ordering that for the future the coin should remain at 28 livres per marc.

From this I conclude, that his intention was to leave, at his death, the coin of his kingdom of the same standard he had found it to be at the beginning of his reign, and at which he had preserved it invariably, during the flourishing state of his kingdom, for the space of 46 years; that is, until the year 1689.

He could not fail to be sensible of the infinite prejudice occasioned to debtors and creditors by the variations he had practised upon the coin from 1689.

To this standard, then, it was brought the very day after his death, and no sooner: therefore his debt of two thousand millions of livres should regularly be estimated according to that rate; or at about 40 shillings sterling for every 28 livres: 40 shillings being, within a trifle, the value of 8 ounces or one marc of standard silver, Paris weight.

At this rate of conversion, the two thousand millions were equal to 142,857,140_l_. sterling.

Soon after the King’s death, on the 2d of January 1716, the new ministry issued an edict, which totally destroyed all. This was the most extraordinary operation, I believe, ever invented; and to it was owing the establishment of Mr. Law’s bank: I must therefore explain it.

There had been no general coinage since 1709; the louis d’or had then been coined at 20 livres, and the crowns at 5, as has been said. The edict of 2d January 1716, ordered a new general coinage, on the same footing, both as to weight, fineness, and denomination, as that of 1709: the only difference was, that the first had an old man’s head upon it; the other had that of a child of six years old.

By this first operation, there was an end put to the former diminutions on the denomination of the coin; which was now raised again to 40 livres the marc, as in 1709[14]. This is nothing:

Footnote 14:

Here is also an operation upon debts. The day before this edict, that is, the 1st of January 1716, the value of the King’s debts was (as has been said) above 142 millions sterling: but an edict comes, raising the coin to 40 livres per marc; and consequently, reducing the debts to the value of 100 millions sterling.

There being no difference between the old coin and the new, except the stamp, the old coin was called in, and a new face was stamped on the very same pieces. But when the louis d’ors were called in, they were received at the mint at no more than 16 livres; and by a stroke of the wheel, they were, in an instant, converted into 20 livres, the denomination of the new coin.

Thus a person who brought 20 old louis d’ors to the mint, received back 16 of his own 20, new stamped, and no injustice was said to be done, from this demonstration of ministerial algebra, viz. 16 × 20 = 20 × 16. Can any thing be more clear and instructive! Some of my readers may not give credit to this; but it is true nevertheless.

Under these circumstances, it was natural for the inhabitants to wish to dispose of their old coin, at any other market than at the King’s mint. They did what they could to smuggle it to Holland; where the industrious Dutchman stamped a 16 livre piece with the head of a child, as well as the King of France could do, and sent it back to France for a 20 livre piece. These operations were prevented as well as government could; and every method was tried to force in the old coin to the mint.

Mr. Law judged this a very proper occasion to form the plan of a bank of circulation, upon the principles we have already explained.

He gave in his scheme to the Duke of Orleans; by whom it was approved of; and the bank was established the 2d of May of the same year 1716.

The first thing Mr. Law did, was to buy up with bank notes this old coin, at a price above what the mint gave, but many per cent. below the proportion of its value: his paper (payable in the new coin at 40 livres per marc) was run upon for this, as well as other reasons; and an immense profit ensued.

This anecdote, I think, is curious, and tends to unfold Mr. Law’s combinations, in the proposal he made to the Duke of Orleans for erecting a bank at this period of time.

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CHAP. XXV. Continuation of the Account of Law’s Bank.

The bank accordingly was established in favour of Law and Company, by letters patent, of the 2d of May 1716. The Company was called, the General Bank; and the note run thus:

The bank promises to pay to the bearer at sight — livres, in coin of the same weight and fineness with the coin of this day, value received at Paris.

The first fund of this bank consisted in 1200 actions (or shares) of one thousand crowns, (or 5000 livres) bank money; in all six millions; the crown being then 5 livres, 8 to the marc; silver coin at 40 livres per marc, as has been said; which makes this livre just worth one shilling sterling: consequently, the shares were worth 250_l._ sterling, and the bank stock worth 300,000_l_. sterling.

By the clause in the note, by which the bank was obliged to pay according to the then weight and fineness of the coin, those who received their paper were secured against the arbitrary measures common in France of raising the denomination of the coin; and the bank was secured against the lowering of it. In a short time, most people preferred the notes to the coin; and accordingly they passed for 1 per cent. more than the coin itself.

This bank subsisted, and obtained great credit, until the 1st of January 1719: at which time the King reimbursed all the proprietors of the shares, and took the bank into his own hand, under the name of the Royal Bank[15].

Footnote 15:

Here the bank departed from the principles of private and mercantile credit, upon which Law had formed it, and proceeded upon those of public credit. Public credit in France is the credit of the Sovereign; the solidity of which depends upon the maxims which he follows in the course of his administration.

Upon this revolution, the tenor of the note was changed. It ran thus: The bank promises to pay to the bearer, at sight, — livres, in silver coin, value received at Paris.

By this alteration, the money in the notes was made to keep pace with the money in the coin; and both were equally affected by every arbitrary variation upon it. This was called, rendring the paper monnoie fixe; because the denominations contained in it did not vary according to the variations of the coin: I should have called it monnoie variable; because it was exposed to changes with respect to its real value.

Mr. Law strenuously opposed this change in the bank notes. No wonder! it was diametrically opposite to all principles of credit. It took place, however; and no body seemed dissatisfied: the nation was rather pleased: so familiar were the variations of the coin in those days, that no body ever considered any thing with regard to coin or money, but its denomination: the consequences of the variations in the value of denominations, upon the accompts between debtors and creditors, were not then attended to; and the credit of the notes of the royal bank continued just as good as that of Mr. Law; although the livres in this contained a determinate value; and the livres in that could have been reduced at any time to the value of halfpence, by an act of the King’s authority, who was the debtor in them. Nay more, they in fact stood many variations during the course of the system, without suffering the smallest discredit. This appears wonderful; and yet it is a fact.

Political writers upon the affairs of France at this period, such as De Melon, Savarie, Dutot, and others, abundantly certify the incredible advantage produced by the operations of Mr. Law’s bank; and the chain of events which followed, in the years 1719, and 1720, when it was in the King’s hands, shew to what a prodigious height credit arose upon the firm foundation laid by Mr. Law[16].

Footnote 16:

Dutot, speaking of the great value of paper in notes and actions, throws out several reflections, in the passage I am now to transcribe from him, which, at the same time that they prove the great advantages resulting to France from the establishment of credit among them, abundantly evince how lame this author’s ideas were concerning the principles of paper credit, and of circulation. He says, (vol. ii. p. 200.) “This paper was indeed just so much real value, which credit and confidence had created, in favour of the state: and by this sum was circulation augmented, independently of all the coin which was then in France.”

"Upon this revolution, Plenty immediately displayed herself through all the towns, and all the country. She there relieved our citizens and labourers from the oppression of debts, which indigence had obliged them to contract: she revived industry: she restored that value to every fund, which had been suspended by those debts: she enabled the King to liberate himself, and to make over to his subjects, for more than fifty-two millions of taxes, which had been imposed in the years preceeding 1719; and for more than thirty-five millions of other duties, extinguished during the regency. This plenty sunk the rate of interest; crushed the usurer; carried the value of lands to eighty and a hundred years purchase; raised up stately edifices both in town and country; repaired the old, which were falling to ruin; improved the soil; gave a value to every fruit produced by the earth, which before that time had none at all. Plenty recalled those citizens, whom misery had forced to seek their livelihood abroad. In a word, riches flowed in from every quarter. Gold, silver, precious stones, ornaments of all kinds, which contribute to luxury and magnificence, came to us from every country in Europe. Whether these prodigies, or marvellous effects, were produced by art, by confidence, by fear, or by whim if you please, one must agree, that that art, that confidence, that fear, or that whim, had operated all these realities which the antient administration never could have produced.

"What a difference in the situation of France at the beginning of the regency, and the situation in which she was in November 1719!

“Thus far the system had produced nothing but good: every thing was commendable, and worthy of admiration.” These are the sentiments of Dutot, concerning this system of paper credit.

But alas! the superstructure, then, became so far beyond the proportion of the foundation, that the whole fabric fell to ruin, and involved a nation, just emerging from bankruptcy and inanition, into new calamities, almost equal to the former.

As long as the credit of this bank subsisted, it appeared to the French to be perfectly solid. The bubble no sooner burst, than the whole nation was thrown into astonishment and consternation. No body could conceive from whence the credit had sprung; what had created such mountains of wealth in so short a time; and by what witchcraft and fascination it had been made to disappear in an instant, in the short period of one day.

Volumes have been since writ in France, by men of speculation, in order to prove, that it was a want of confidence in the public, and not the want of a proper security for the paper, which occasioned this downfal.

This, if we judge by what has been writ, has been the general opinion of that nation to this day: and since it was found impossible, in France, to create confidence in circulating paper, which had no security for its value, many people there, and some even among ourselves, conclude, that a great part of the wealth of Great Britain, which consists in paper, well secured, is false and fictitious.

I shall now proceed to set before my reader the great lines of the royal Mississippi bank of France, from the 1st of January 1719, to the total overthrow of all credit, upon the fatal 21st day of May 1720. This was a golden dream, in which the French nation, and a great part of Europe was plunged, for the short space of 506 days.

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CHAP. XXVI. _Account of the Royal Mississippi Bank of France, established on Public Credit._

In order to unravel the chaos of this affair in a proper manner, it will not be amiss to begin by giving the reader an idea of the plan which naturally might suggest itself to the Regent of France, from the hint of Mr. Law’s bank. By the help of this clue, he will be the better able to conduct himself through the operations of this system, as the French call it.

The Regent perceived, that in consequence of the credit of Law’s bank, people grew fond of paper-money. The consequence of this, he saw, was, to bring a great quantity of coin into the bank. The debts of France were very great, being, as has been said, above 2000 millions. The coin, at that time, in France, was reckoned at about 1200 millions, at 60 livres the marc, or 40 millions sterling. The Regent thought, that if he could draw either the whole, or even the greatest part of this 1200 millions of coin into his bank, and replace the use of it to the kingdom, by as much paper, secured upon his word, that he should then be able to pay off, with it, near one half of all the debts of France: and by thus throwing back the coin into circulation, in paying off the debts, that it would return of itself into the bank, in the course of payments made to the state; that credit would be thereby supported, as the bank would be enabled to pay in coin the notes as they happened to return, in the course of domestic circulation.

This was both a plausible and an honest scheme, relatively to a Duke of Orleans, whom we cannot suppose to have been master of the principles of credit; and very practicable in a country where there was so great a quantity of coin as 40 millions sterling, and a well established credit in the bank, which prevented all runs upon it from diffidence. Nothing but a wrong balance of trade could have occasioned any run for coin; because, for the reason already given, the paper bore for the most part a premium of 1 per cent. above it.

Accordingly, during the whole year 1719, the credit of the royal bank was without suspicion, although the Regent had, by the last day of December of that year, coined of bank paper, for no less a sum than 769 millions, reckoning in 59 millions of paper, which had been formerly issued by the general bank of Law and company; for which he had given value to the proprietors, when he took the bank into his own hands, as we have said above.

I must here observe, that by this plan of the Regent, there was, in one sense, a kind of security for the notes issued. So far as they were issued for coin brought in from the advanced value of the paper, this coin was the security: in the second place, when the coin was paid away to the creditors of the state, the Regent withdrew the obligations which had been granted to them; and although I allow that the King’s own obligation withdrawn, was no security to the public, who had received bank notes for the payment; yet still the interest formerly paid to the creditors, was a fund out of which, upon the principles of public credit, the annual interest for the notes was secured. Had, indeed, the French nation perceived upon what bottom the security for the paper stood, during the year 1719, perhaps the credit of the bank might have been rendred precarious; but they neither saw it or sought after it: and the men of speculation were all of opinion, that as long as there was no more paper issued by the bank than there was coin in the kingdom, there could be no harm done. Of this any person who has read Dutot, de Melon, Savarie, and others, will be perfectly satisfied[17]. And I desire no farther proof of the total ignorance of the French in matters of this kind, than to find them agreeing, that bank paper is always good, providing there be coin in the nation to realize it, although that coin be not the property of the bank. [Dutot, p. 132, 133.] On the contrary, it is very evident from what has been said, that although there should be a thousand times more coin in a country than the bank paper, still that bank paper must be a mere delusion, and, in fact, of no value whatsoever, except so far as the bank is possessed of the value of it in one species of property or another.

Footnote 17:

It is astonishing to find how gravely Messrs. de Melon and Dutot reasoned concerning the nature of paper money, and the effects of changing the value of the coin. They both seemed to agree that a livre was a livre whether it was the 28th or the 50th part of a marc of silver, whether it was a denomination upon paper, well or ill secured, no matter which.

The whole reasoning turned merely on the question, who were robbed, and who fantastically enriched by such absurd operations upon the coin of a country?

The jargon of such men certainly contributed a great deal to darken the understandings of the ministry at this time; and to make them believe that the affairs of money were infinitely more obscure and more difficult to be understood than they really are.

There are thousands of examples where mankind, with their learning and reasoning, have turned common sense into inextricable science; this I think is a famous instance of it: and it is rendring no small service to the world, to destroy, in a manner, what others have been at so much pains to establish. This is restoring common sense to its native dress, in which it becomes intelligible to every one.

I know very well that the ministry of France have now very different notions concerning paper credit; but these notions have not as yet reached the press, except in some of the King’s answers to the remonstrances of the parliament of Paris in 1760. These answers were dictated upon sound principles, and do great honour to the ministry.

The old notions still prevailed in the remonstrances of the parliament. This plainly appears from the proposal they made to the King, at that time, to issue paper to the amount of 200 millions, which the parliament was to make good. An expedient to avoid doing that which right reason demanded of them, viz. first to secure a fund for the paper, and then to borrow upon that fund. This proposal from the parliament, and the King’s rejecting it, proves that credit was then better understood in the cabinet than in the palais.

And on the other hand, let the bank paper exceed the quantity of coin in the proportion of a thousand to one, yet still it is perfectly good and sufficient, providing the bank be possessed of an equivalent value in any species of good property. This I throw in here to point out how far the French were, at least at that time, and many years after, when Dutot and Melon wrote, from forming any just notion of the principles of banking. And, I believe, I may venture to say, that the only reason why banks have never been established in France, is, because the whole operation is still a mystery to them. I ground this conjecture upon an opinion of M. de Montesquieu, who thinks that banks are incompatible with pure monarchy; a proposition he would never have advanced had he understood the principles upon which they are established.

The next remarkable and interesting revolution made upon this famous bank, was by the arret of February 22, 1720; which constituted the union of the royal bank with the company of the Indies.

By this arret, the King delivered to that company the whole management of the bank with all the profits made by him since the first of January 1719, and in time coming. Notwithstanding this cession, the King remained guarantee for all the notes, which were not to be coined without an order of council: the company was to be responsible to the King at all times for their administration; and, as a security for their good management, they engaged to lend the King no less than sixteen hundred millions of livres.

Here is the æra and beginning of all the confusion. From this loan proceeded the downfal of the whole system.

But before I proceed to explain the scheme of the Regent in these operations upon credit, I think it will contribute to the clearing up of the subject in general, to premise some short account of the rise and progress of this great company of the Indies: and to give a short abstract of some of the most memorable transactions during the Missisippi scheme, in the order of time in which they followed one another.

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CHAP. XXVII. A short Account of the French Company of the Indies.

Cardinal de Richlieu, that great minister to Louis XIII. was the first who established trading companies in France, anno 1628, about the time of the siege of Rochelle.

He then set on foot the companies of the West and East Indies.

Several others, viz. one for Canada, one for the Leeward Islands, and another for Cayenne, were successively established in the beginning of the reign of Louis XIV.

These companies, before 1664, had frequently changed their forms, and had succeeded very ill.

At that time the great Colbert was in the administration of the King’s affairs. He engaged his master to think seriously of establishing the trade of his kingdom upon solid principles; for which reason all the undertakers of the former projects of commerce to the new world were reimbursed; and a new establishment was made, called the Compagnie des Indes Occidentales.

This exclusive trade comprehended that of Canada, the Caribbee Islands, Acady, Newfoundland, Cayenne, the French continent of America, from the river of the Amazons to that of Oronoko, the coasts of Senegal, Goree, and other places in Africa; the whole for 40 years.

The same year, 1664, there was another company formed for the East Indies, of which we shall speak afterwards.

The greatest encouragement was given to these new establishments. Large sums were advanced by the King for several years, without interest, and upon condition, that if, at the end of that term, any loss was found on the trade, it should fall upon the money due to the King.

On examining into the West India company’s affairs, after ten years administration, that is to say, in the year 1674, it was found, that instead of profiting of their extensive privilege, by carrying on a regular trade themselves, they had sold permissions to private people to trade with them.

This abuse in the company had, however, inspired a taste for trade among the French; which the King wishing to improve, he reimbursed to the company all their expences, added their possessions to his domain, and threw the trade open to his subjects.

Thus ended the first company of the West Indies, called by the French, the Compagnie d’Occident.

After the suppression of this company, the French trade to America was carried on and improved by private adventurers, some of which obtained particular grants, to enable them to form colonies. Of this number was Robert Chevalier de la Sale, a native of Rouen. It was he who first discovered the river Missisippi, and who proposed to the King, in 1683, to establish a colony there. He lost his life in the attempt.

Hiberville, a Canadian, took up the project; but soon died. He was succeeded by Antony Crozat, in 1712, who had better success; but the death of the King in 1715, and the rising genius of Mr. Law, engaged the Regent of France to make Crozat renounce his exclusive privilege of trading. Upon which, by edict of the 6th of September 1717, was formed the second Compagnie d’Occident, in favour of Mr. Law: to which was added the fur trade of Canada, then in the hands of private adventurers, and the farm of the tobacco, for which he paid 1,500,000 livres a year.

I now come to the East India company.

I have already mentioned the establishment of it by the great Colbert in 1664.

After his death, want of experience in those who succeeded him, abuse of administration, carelesness in those who carried on the company’s business, competition between different companies, and, in short, every obstacle to new establishments, concurred with the consequences of the long and expensive wars of Louis XIV. to render all commercial projects ineffectual; and all the expence bestowed in establishing those companies was in a manner lost.

In 1710, the merchants of St. Malo undertook the East India company. It languished in their hands until 1719, and their importations were not sufficient to supply the demand of France for India goods: for this reason it was taken from them, and incorporated with Mr. Law’s company of the West Indies, in May 1719.

By this incorporation was established the great Company of the Indies, which still subsists in France: the only monument extant of the famous and unfortunate Law.

For the better understanding, therefore, what is to follow, let us attend to some historical and chronological anecdotes, relative to the wonderful operations of this Missisippi bank, and company of the Indies. These I shall set down according to the order of time in which they happened, that my reader may have recourse to them as he goes along.

Without the help of this table, I should be involved in a history of those events, which however amusing it might be to some readers, would be quite inconsistent with the nature of this inquiry.

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CHAP. XXVIII. Chronological Anecdotes.

[Sidenote: 1709.]

A general coinage in France: the marc of standard silver, worth two pounds sterling, put at 40 livres denomination.

September 1713. The late King reduces the denomination of the silver coin to 28 livres the marc, and the gold in proportion.

These reductions were made gradual and progressive, and were finally to take place no sooner than the 2d of September 1715.

August 1715. The King declares, that in time coming, the coin was to remain stable at 28 livres the marc of fine silver.

September 1715. The King dies.

January 2, 1716. The Regent of France orders a new general coinage: raises the silver coin to 40 livres the marc, and calls down the old King’s coin (though of the same weight, fineness, and denomination) 20 per cent.

May 1716. Mr. Law’s bank established: bank notes coined; and the old coin bought up at great discount.

September 6, 1717. Mr. Law’s company of the West established.

September 4, 1718. He undertakes the farm of tobacco.

September 22, 1718. The first creation of actions of the company of the West to the number of 200,000, subscribed for in state billets, at the rate of 500 livres per action.

January 1, 1719. The bank taken from Law, and vested in the King. At this time the number of bank notes coined amounted to 59 millions of livres.

April 22, 1719. A new coinage of 51 millions of notes; in which the tenure of the note was changed, and the paper declared monnoie fixe.

May 1719. Mr. Law’s company of the West incorporated with the company of the East Indies; after which it was called the Company of the Indies.

June 1719. Created 50,000 new actions of the incorporated company; sold for coin at 550 livres per action.

June 10, 1719. Coined of bank notes for 50 millions of livres.

June 1719. The mint made over to the company for 50 millions.

July 1719. Created 50,000 actions as above, sold, for notes, at 1000 livres per action.

July 25, 1719. Coined of bank notes for 240 millions.

August 1719. The company obtains the general farms: promises a dividend upon every action of 200 livres: agree to lend the King sixteen hundred millions at 3 per cent. and have transferred to them 48 millions per annum for the interest of that sum.

September 12, 1719. Coined of bank notes for 120 millions.

September 13, 1719. Created no less than 100,000 actions; price fixed at 5000 livres per action.

September 28, 1719. Created 100,000 more actions, price as the former, fixed at 5000 livres each.

October 2, 1719. Created 100,000 more actions, price as the former, at 5000 livres each.

October 4, 1719. Coined by the Regent’s private order, not delivered to the company, 24,000 more actions, which compleated the number of 624,000 actions; beyond which they never extended.

October 24, 1719. Coined of bank notes for 120 millions. December 29, 1719. Coined of bank notes for 129 millions. January 1720. Coined of bank notes for 21 millions. February 1720. Coined of bank notes for 279 millions.

February 22, 1720. Incorporation of the bank with the company of the Indies.

February 27, 1720. A prohibition by which no one was to have in his custody more than 500 livres of coin.

March 5, 1720. The coin raised to 80 livres per marc.

March 11, 1720. The coin brought down to 65 livres per marc; and gold forbid to be coined at the mint, or used in commerce.

livres. March 1720. Coined of bank notes for 191 803 060 April 1720. Coined of bank notes for 792 474 720 May 1, 1720. Coined of bank notes for 642 395 130

May 21, 1720. The denomination of the paper diminished by arret of council, which, in an instant, put an end to all credit, and made the bubble burst.

At this period had been coined of bank notes to the immense

livres sum of 2 696 400 000 Of which had been issued 2 235 083 590 ————————————— Remained in the bank 461 316 410

Dutot, Vol. I. p. 144. Vol. II. p. 207.

May 27, 1720. The arret of the 21st of this month recalled, and the paper restored to its full denomination.

May 29, 1720. The coin raised to 82 livres 10 sols per marc.

June 3, 1720. 400,000 actions belonging to the Regent are burnt; and the 24,000 more, which were created October 4, 1719, suppressed; also 25 millions of the interest formerly granted to the company for their loan of 1600 millions, retroceded by the company, and constituted again upon the town-house of Paris.

October 10, 1720. All bank notes are ordered, by arret of this day, to be suppressed, if not brought to the bank before the 1st of December following, in order to be paid in manner therein specified.

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CHAP. XXIX. Continuation of the Account of the Royal Bank of France, until the time that the Company of the Indies promised a Dividend of 200 Livres per Action.

These things premised, what follows will, I hope, be easily understood.

So soon as the Regent of France perceived the wonderful effects produced by Mr. Law’s bank, he immediately resolved to make use of that engine, for clearing the King’s revenue of a part of the unsupportable load of 80 millions of yearly interest, due, though indeed very irregularly paid, to the creditors.

It was to compass this end, that he bestowed on Mr. Law the company of the West Indies, and the farm of the tobacco.

To absorb 100 millions of the most discredited articles of the King’s debts, 200,000 actions or shares of this company were created. These were rated at 500 livres each, and the subscription for the actions was ordered to be paid in billets d’etat, so much discredited by reason of the bad payment of the interest, that 500 livres, nominal value in these billets, would not have sold upon change for above 160 or 170 livres. In the subscription they were taken for the full value. As these actions became part of the company’s stock, and as the interest of the billets was to be paid to them by the King, this was effectually a loan from the company to the King of 100 millions at 4 per cent.

The next step was to pay the interest regularly to the company. Upon this the actions which had been bought for 170 livres, real value, mounted to par, that is, to 500 livres.

This was ascribed to the wonderful operations of the bank; whereas it was wholly owing to the regular payment of the interest.

In May following 1719, the East India company was incorporated with the West India company: and the 200,000 actions formerly created, were to be entitled to a common share of the profits of the joint trade.

But as the sale of the first actions had produced no liquid value which could be turned into trade (having been paid for in state billets) a new creation of 50,000 new actions was made in June 1719, and the subscription opened at 550 livres payable in effective coin.

The confidence of the public in Mr. Law, was at this time so great, that they might have sold for much more: but it was judged expedient to limit the subscriptions to this sum; leaving the price of the actions to rise in the market, according to demand, in favour of the original subscribers.

This money amounting to 27 500 000 livres in coin, was to be employed in building of ships, and other preparations for carrying on the trade.

The hopes of the public were so much raised by the favourable appearance of a most lucrative trade, that more actions were greedily demanded.

Accordingly in a month after (July 1719) another creation was made of 50,000 actions; and the price of them fixed at 1000 livres.

It must be observed, that all actions delivered by the company of the Indies, originally contained an obligation on the company for no more than 4 per cent. upon the value of 500 livres, with a proportion of the profits on the trade; so that the rise of the actions proceeded entirely from the hopes of those great profits, and from the sinking of the rate of interest; a consequence of the plenty of money to be lent.

But besides the trade, what raised their value at this time, was, that just before the last creation of actions, the King had made over the mint to the company for a consideration of 50 millions of livres; and this opened a new branch of profit to every one interested.

The sale of the last coined actions taking place at 1000 livres each, so great a rise seems to have engaged the Regent to extend his views much farther than ever. To say that he foresaw what was to happen, would be doing him the greatest injustice. He foresaw it not, most certainly; for no man could foresee such complicated events. But had he conducted himself upon solid principles; or by the rules which, we now say, common honesty required, he certainly never would have countenanced the subsequent operation.

The fourth creation of actions was in the beginning of September 1719.

In the interval between the third and the fourth creation, the Regent made over the general farms to the company, who paid three millions and a half advanced rent for them. And the company obliged themselves to lend the King (including the 100 millions already lent upon the first creation of actions) the immense sum of 1600 millions at 3 per cent. that is, for 48 millions interest. Now it is very plain, that before the month of September 1719, it was impossible they could lend the King so great a sum.

They had already lent him, in September 1718, 100 millions, by taking the billets d’etat for the subscription of the first creation of actions; the second creation had produced coin, laid out in mercantile preparations; and the third creation of actions, at the standard value, was worth no more than 50 millions of livres: this was their whole stock. Where then could they find 1500 millions more to lend?

I therefore conclude, that at this time, the combination which I am now to unfold, must have, more or less, taken place between the Regent and this great company.

The public was abundantly imbibed with the notion of the prodigious profits of the company, before they got possession of the general farms. No sooner had they got that new source of riches into their hands, than they promised a dividend of no less than 200 livres on every action, which was ten times more than was divided on them when at first created.

The consequence of this was, that (supposing the dividend permanent and secure) an action then became as well worth 5000 livres as at first it was worth 500 livres; accordingly to 5000 did it rise, upon the promise of the new dividends.

But what could be the motive of the company to promise this dividend, only three months after their establishment? Surely, not the profits upon a trade which was not as yet opened. Surely, not the profits upon the King’s farms; for these profits it was greatly their interest to conceal.

Their views lay deeper. The Regent perceived that the spirit of the nation was too much inflamed, to suffer them to enter into an examination of the wonderful phænomena arising from the establishment of the bank, and company of the Indies. If the company promised 200 livres dividend, the public concluded that their profits would enable them to pay it; and really in this particular the public might be excused.

The plan, therefore, concerted between the Regent and the company seems to have been, to raise the actions to this great value, in order to suspend a greater quantity of notes in circulation.

This was to be accomplished, 1. by the Regent’s purchasing the actions himself from the company; 2. by borrowing back the notes he had paid for them, in order to fill up the loan which the company had agreed to make; 3. to pay off all the public creditors with those notes so borrowed back; and 4. when the nation was once filled with bank paper, to sell the actions he had purchased from the company, to withdraw his own paper, and then destroy it.

By this operation the whole debts of France were to be turned into actions; and the company was to become the public debtor, instead of the King, who would have no more to pay but 48 millions of interest to the company.

By this operation also, the Regent was to withdraw all the bank notes which he had issued for no other value but for the payment of debts; which notes were demandable at the bank; and for the future, he was to issue no more (I suppose) but for value preserved.

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CHAP. XXX. Inquiry into the Motives of the Duke of Orleans in concerting the Plan of the Missisippi.

Now if we examine the motives of the Regent, with regard to this plan, and suppose that he foresaw all that was to happen in consequence of it; and if we also suppose that he really believed that the company never could be in a situation to make good the dividend of 200 livres, which they had promised upon their actions; in a word, if we put the worst interpretation upon all his actions, we must conclude that the whole was a most consummate piece of knavery.

But as this does not appear evidently, either by the succeeding operations, or ultimate consequences of this scheme, I am loth to ascribe, to that great man, a sentiment so opposite to that which animated him, on his entrance upon the regency, when he nobly rejected the plan proposed to him for expunging the debts altogether.

I may therefore suppose, that he might believe that the company to whom he had given the mint, the tobacco, the farms, and the trade of France, and to whom he soon after gave the general receipt of all the revenue, might by these means be enabled to make good their engagements to the public. I say, this may be supposed; in which case justice was to be done to every one; and the King’s debts were to be reduced to 48 millions a year, instead of 80 millions.

That this is a supposeable case, I gather from Dutot, who gives us an enumeration of the revenue of the company, Vol. I. p. 162. as follows:

Revenue of the Company of the Indies.

Interest paid to the company per annum 48 000 000 Profits upon the general farms 15 000 000 Ditto upon the general receipt of other taxes 1 500 000 Ditto upon the tobacco 2 000 000 Ditto upon the mint 4 000 000 Ditto upon their trade 10 000 000 —————————— In all of yearly income 80 500 000

Now if we suppose the interest of money at 3 per cent. this sum would answer to the capital of 2664 millions, which was more than all the debts of the kingdom, for which they were to become answerable.

Upon this view of the matter, I say, it was possible, that the Regent might form this plan, without any intention to defraud the creditors; and more I do not pretend to affirm.

I have said that he purposely made the company raise the price of their actions, in order to draw more notes into circulation.

To this it may be objected, that he might as well have paid off the creditors with bank notes, without going this round-about way to work; and have left them to purchase the actions directly from the company.

I answer, that such an operation would have appeared too bare-faced, and might have endangered the credit of the bank. Whereas in buying the actions, which were run upon by every body, the state only appeared desirous of acquiring a share of the vast profits to be made by the company. Farther,

As the company appeared willing to accept of bank notes from the state, in payment of their actions, this manœuvre gave an additional credit, both to the actions, and to the notes; a thing very necessary to be attended to, in a scheme which was calculated to bring about a total transformation of the security for the King’s debts.

I must however observe, that at the period concerning which we are now talking, (viz. at the time the company promised the dividend of 200 livres per action) the plan we have been describing could not have been carried into execution.

There were at that time only 400,000 actions created, rated at 777 millions: of these were disposed of at least 250,000, to wit, the original 200,000; and the second creation of 50,000, sold for coin. Besides, there were then only coined in bank notes for 520 millions. So there was not a possibility of executing the plan I have mentioned, as matters then stood.

It is from the subsequent operations of the system, that it appears evident that this and this only could be the intention.

We shall see how the number of actions were multiplied, without any other view than to make the public imagine, that the funds necessary for carrying on the trade of the company were immense.

The number of the actions sold to the public was very inconsiderable, compared with those sold to the Regent, and found in his hands at the blowing up of the system.

Besides, at the period when the number of actions was carried to the utmost, viz. to 624,000, the bank notes bore no proportion to their value; for, on the 4th of October 1719, when the last creation of actions was made, the bank notes did not exceed the sum above specified, to wit, 520 millions.

But in tracing the progress of the system upon the table, we perceive, that after the actions were once carried to their full number, (October 4th, 1719) then the coining of bank notes began at a most prodigious rate; in so much, that by the month of May 1720, they were increased from 520 millions, to above 2696 millions; and all this sum, except 461 millions, were found in circulation.

Farther: We shall see, that when the Regent and the company made out their accompts, there were found in the Regent’s hands no less than 400,000 actions, which were burnt; and 25 millions of interest upon the sum of money due by the King to the company, extinguished.

These facts prove beyond a doubt, that these 400,000 actions had been bought with the notes coined posterior to the 4th of October 1719; otherwise the actions could not have become the property of the state.

Besides, it was acknowleged publicly, that the notes were coined for that purpose. (See Dutot, Vol. I. p. 144.) In the next place, it is evident, that the notes which had been given in payment for those actions, had been borrowed back, to fill up the loan of 1600 millions of livres; which the company never could have otherwise lent to the King. And in the last place, it is certain that the public debts were paid off with these notes, so borrowed back from the company: because we shall find the notes in circulation at the blowing up of the system, in May 1720; and we shall see how they were paid and withdrawn in October following.

This detail I own is a little long, and perhaps too minute: but I thought it necessary to prove the solidity of my conjectures concerning the Regent’s motives in concerting this plan; which no French author, that ever I saw, has pretended to unfold, except by hints too dark to be easily comprehended.

What is now to follow, will still set my conjectures in a fairer light. We have seen already from the table, with what rapidity the creation of actions went on from the 13th of September to the 4th of October 1719. No less than 324,000 were created in that interval.

Yet Dutot, vol. ii. p. 169, et seq. positively says, that on the 4th of October, the company had not sold for more than 182,500,000 livres of their actions. Now the total value, as they were rated when created, extended to 1,797,500,000; so there was little more than one tenth part of the value sold off.

Why therefore create such immense quantities of actions, and so far beyond the demand for them, but to throw dust in the eyes of the public; to keep up the spirit of infatuation; and to pave the way for the final execution of the plan?

The actions being brought, by four successive creations, of the 13th and 28th of September, the 2d and 4th of October, to their full number, the company, during that interval, obtained the general receipt of the whole revenue. Thus, says Dutot, vol. ii. p. 197. the company was intrusted with the whole revenue, debts and expences of the state, and all unnecessary charge was avoided in collecting and administring it.

In the month of November 1719, the credit of the bank, and of the company, was so great, that the actions rose to 10,000 livres. Notwithstanding, says Dutot, vol. ii. p. 198. that the company did what they could to keep down the price, by throwing into the market, in one week, for no less than 30 millions. He assigns seven different reasons for this, which, all put together, are not worth one; to wit, that the Regent was ready to buy up every one that lay upon hand, in concert with the company.

If the company had been inclined to keep down the price of the actions, they had nothing more to do than to deliver part of the vast number they still had unsold, at the standard value of 5000 livres, at which they were rated when created; and this would have effectually prevented their rising to 10,000 livres.

But it was the interest of the Regent, who was at that time well provided with actions, to stock-job, and to buy with one hand, while he was selling with the other: these operations were then as well known in the street called Quinquempoix, as now in Change-alley.

As a proof of the justness of my allegation, that the Regent was doing all he could to raise the price of the actions, Dutot informs us, in the place above cited, that the bank, at this very time, was lending money, upon the security of actions, at 2 per cent. If that was the case, how was it possible that an action, with 200 livres dividend, should sell for less than 10,000 livres, which is the capital corresponding to 200 livres, at 2 per cent.?

This is evident; and were it necessary, it may be proved to demonstration, that the rise of the actions was the consequence of a political combination.

But if money, at that time, came to bear no more than 2 per cent. and if the company was able to afford 200 livres upon the action; where was the inequity of raising the actions to 10,000 livres? I confess I can see none, nor do I perceive either the impossibility or improbability of the two postulata, had matters been rightly conducted.

As to money’s falling to 2 per cent. any man of 20 years old may expect to see it, without a Mississippi: and as for the payment of the dividends, there never were in the hands of the public, nor ever could be, had all the creditors of the 2000 millions of public debts invested in actions at 10,000 a-piece, one half of 624,000 actions disposed of: consequently, the 200 livres dividend would not have amounted, upon 312,000 actions, to more than 62,400,000 livres; and the revenue of the company, as we have seen, exceeded 80 millions a year.

This still tends to vindicate the Regent from the gross imputation of fraud, in the conduct of the Missisippi.

But what should still more exculpate that prince, in the eyes of every impartial man who examines the whole conduct of the affair, is the uniform sentiments of the most intelligent men in France concerning the doctrine of money and credit.

When we find Dutot, who wrote against the arbitrary change of the coin; and De Melon, the Regent’s man of confidence and secretary, who wrote for it, two persons considered in France as most able financiers, both agreeing, that during the operations of the system, money never was to be considered but according to denominations; that there was nothing against good policy in changing the value of these denominations; and that paper-money, whether issued for value, or for no value, or for the payment of debts, was always good, providing there was coin enough in France for the changing of it, although that coin did not belong to the debtors in the paper; when these principles, I say, were adopted by the men of penetration in France; when we find them published in their writings, many years after the Regent’s death, as maxims of what they call their credit public; I think it would be the highest injustice to load the Duke of Orleans with the gross imputation of knavery, in the Missisippi scheme.

Law no doubt saw its tendency. But Law saw also, that credit supported itself on those occasions, where it stood on the most ticklish bottom: he saw bank notes to the amount of more than two thousand millions, issued in payment of the King’s debts, without occasioning any run upon the bank, or without suggesting an idea to the public that the bank should naturally have had some fund, to make them good: he saw people, who were in possession of a value in paper exceeding 6000 millions of livres, 60 to the marc, (Dutot, vol. i. p. 144.) look calm and unconcerned, when, in one day, the coin was raised in its denomination to 80 livres in the marc; by which operation, the 6000 millions of the day before lost 25 per cent. of their real value. He saw that this operation did not in the least affect the credit of the bank paper; because people minded nothing but denominations.

He saw farther, that by the operation proposed, the whole debt of the King would be transferred upon the company. He saw that these debts, being turned into bank notes, would not be sufficient to buy above 200,000 actions, at the value they then sold for. He knew that the Regent, who had bought 400,000 of these actions at 5000 livres apiece, that is, at half price, would remain in possession of 200,000 actions, after selling enough to draw back the whole of the bank notes issued for the payment of the debts; and he saw that the company of the Indies had a yearly income of above 80 millions to enable them to make good their engagements: besides, he saw a power in the King to raise the denominations of the coin at will, without shocking the ideas of his people, by which means he might have paid the 2000 millions with one louis d’or. Put all these circumstances together, and I can imagine that Law’s brain was turned; that he had lost sight of all his principles; and that he might believe that his former common sense, was, at that time, become absolute nonsense in France.

That common sense may become nonsense, is a thing by no means peculiar to France, but quite peculiar to man.

I shall offer but one argument more, to prove that the Duke of Orleans, and Law, could have no premeditated design of defrauding the public, by these wonderful operations; which is, that admitting the contrary, would be allowing them an infinite superiority of understanding over all the rest of Europe.

Until the bubble burst, no body could know where it was to end: every thing appeared very extraordinary indeed; and the fatal catastrophe might have been expected from the greatness of the undertaking, merely. But if there had been any roguery in the plan itself, it must have appeared palpable long before; because the whole of the operations in which only it could consist, were public.

All the notes were created by public act of council; so were the actions: the loan of 1600 millions to the King, by the company, was a public deed; so was the alienation in their favour, of 48 millions for the interest of that sum. Notes were avowedly coined in order to purchase actions, (Dutot, Vol. I. p. 144.) the creditors were avowedly paid with bank notes, at a time when it was forbid to have 500 livres in coin in any person’s custody; consequently, it was also forbid to demand coin for bank notes.

Now all this was going on in the months of February, March, April, and the beginning of May 1720; and no suspicion of any failure of credit. The coin also was sometimes raised, sometimes diminished in its value, and still the fabric stood firm.

Under these circumstances, to say there was knavery, is to say that all the world were absolutely blockheads, except the Regent and John Law: and to that opinion I never can subscribe.

It may seem surprising that I should take so much pains to vindicate the two principal conductors of that scheme. My intention is not so much to do justice to their reputation, which has been grossly calumniated by many, who have written the history of those times, as to prove, that an ill concerted system of credit may bring ruin on a nation, although fraud be out of the question: and if a nation be plunged into all the calamities which a public bankruptcy can occasion, it is but a small consolation to be assured of the good intentions of those who were the cause of it.

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CHAP. XXXI. Continuation of the Account of the royal Bank of France, until the total Bankruptcy on the 21st of May 1720.

I now resume the thread of my story. We left off at that period when the credit of the company and of the bank was in all its glory, (November 1719) the actions selling at 10,000 livres; dividend 200 livres a year per action; and the bank lending at 2 per cent.: all this was quite consistent with the then rate of money.

In this state did matters continue until the 22d of February 1720, when the bank was incorporated with the company of the Indies.

The King still continued guarantee of all the bank notes, none were to be coined but by his authority: and the controller-general for the time being, was to have, at all times, with the Prevot des marchands of Paris, ready access to inspect the books of the bank.

As the intention, at the time of the incorporation, was to coin a very great quantity of notes, in order to buy up the actions; and to borrow back the money, in order to pay off the creditors; it was proper to gather together as much coin as possible, to guard against a run upon the bank: for which purpose the famous Arret de Conseil, of the 27th of February 1720, was published, forbidding any person to keep by them more than 500 livres in coin.

This was plainly annulling the obligation in the bank paper, to pay to the bearer on demand the sum specified, in silver coin.

Was it not very natural, that such an arret should have, at once, put an end to the credit of the bank. No such thing however happened. The credit remained solid after this as before; and no body minded gold or silver any more than if the denomination in their paper had had no relation to those metals. Accordingly, many, who had coin and confidence, brought it in, and were glad to get paper for it.

The coin being collected in about a week’s time, another Arret de Conseil, of the 5th of March, was issued, raising the denomination from 60 livres to 80 livres the marc. Thus, I suppose, the coin which the week before had been taken in at 60 livres, was paid away at 80: and the bank gained 33⅓ per cent. upon this operation. Did this hurt the credit of the bank paper? Not in the least.

So soon as the coin was paid away, which was not a long operation, for it was over in less than a week; another Arret de Conseil, of the 11th of the same month of March, came out, declaring that, by the first of April, the coin was to be again reduced to 70 livres the marc, and on the first of May to 65 livres. Upon this, the coin, which had been paid away the week before, came pouring into the bank, for fear of the diminution which was to take place the first of April. In this period of about three weeks, the bank received about 44 millions of livres; and those who brought it in thought they were well rid of it.

It was during the months of February, March, and April 1720, that the great operations of the system were carried on.

We may see by the chronological anecdotes in the 36th chapter, what prodigious sums of bank notes were coined, and issued during that time. It was during this period also, that a final conclusion was put to the reimbursing all the public creditors with bank notes: in consequence of which payment, the former securities granted to them by the King, under the authority of the parliament of Paris, were withdrawn and annulled.

Here then we have conducted this scheme to the last period.

There remained only one step to be made to conclude the operation; to wit, the sale of the actions, which the Regent had in his custody to the number of 400,000.

These were to be sold to the public, who were at this time in possession of bank notes to the value of 2 235 083 590 livres. See the foregoing table.

Had the sale of the actions taken place, the notes would all have returned to the bank, and there have been destroyed: by which operation, the company would have become debtor to the public for the dividends of all the actions in their hands, and to the King for all those which might have remained in the hands of the Regent. These proportions we cannot bring to any calculation, as it would have depended entirely on the price of the actions during so great an operation; and on the private conventions between the parties, the Regent and the company.

But alas! all this is a vain speculation. The system which hitherto had stood its ground in spite of the most violent shocks, was now to tumble into ruin from a childish whim.

In order to set this stroke of political arithmetic in the most ludicrous light possible, I must do it in Dutot’s own words, uttered with a sore heart and in sober sadness.

He had said before, that the coin of France was equal to 1200 millions of livres at 60 livres the marc. This marc was now at 65 livres (in May 1720, as above) so the numerary value, as he calls it, (that is the denomination) of the coin was now risen to 1 300 000 000; but the bank notes circulating in the month of May were carried to 2 696 400 000; then he adds,

"The 1300 millions of coin which were in France, were very far from 2696 millions of notes. In that case, the sum of notes was to the sum of coin, nearly as 22⁄27 are to 1; that is to say, that 207 livres 8 sols 1⅞ denier in notes, was only worth 100 livres in coin; or otherwise, that a bank note of 100 livres, was only worth 48 livres 4 sols 5 deniers in coin, or thereabouts." Would not any mortal conclude from this, that the whole sum of 1300 millions had been in the bank, as the only fund for the payment of the paper?

This is a laboured equation, and from it we have a specimen of this gentleman’s method of calculating the value of bank paper: but let us hear him out.

“This prodigious quantity of money in circulation, says he, had raised the price of every thing excessively: so in order to bring down prices, it was judged more expedient to diminish the denomination of the bank notes, than to raise the denomination of the coin; because that diminished the quantity of money, this augmented it.”

This was the grand point put under deliberation, before the famous arret of the 21st of May was given, viz. whether to raise the value of the coin, which did not belong to the bank, but to the French nation, to double the denomination it bore at that time, that is, to 130 livres the marc, by which means the 1300 millions would have made 2600 millions, or to reduce the 2600 millions of bank notes to one half, that is, to 1300 millions, the total denomination of the coin.

To some people it would have appeared more proper, to allow matters to stand as they were, as long as they would stand, at least until the actions had been all sold off; but this was not thought proper. After a most learned deliberation, it was concluded to reduce the denomination of all the paper of France, bank notes as well as actions, instead of raising the denomination of the coin; and this because prices were in proportion to the quantity of the denominations of money.

The arret was no sooner published than the whole paper fabric fell to nothing. The day following, the 22d of May, a man might have starved with a hundred millions of paper in his pocket.

This was a catastrophe the like of which, I believe, never happened: it is so ridiculous that it is a subject fit only for a farce.

Here Dutot’s lamentations and regrets are inimitable.

In one place he says, “Credit was too far stretched to be solid. It was therefore proper to sacrifice one part, to give a solidity to the other. Even this was done; but the consequences did not correspond to the intention. Confidence, which is the soul of credit, eclipsed itself, and the loss of the bank note, drew on the loss of the action.”

In another place he says, “This arret of the 21st of May, which according to some blessoit l’equité” (a very mild expression!) “destroyed all confidence in the public; because the King had diminished one half of that paper money (the bank notes) which had been declared fixed.”

Is it not a thousand pities that confidence should have disappeared upon so slight a wound given to equity, only in the opinion of some? For Dutot thought the operation perfectly consistent with the principles of public credit.

He tells us, that a letter was writ to calm the minds of the people, and to shew them how absurd it was, to allow the paper to be fixed, while the coin varied: but, says he, “as there was a revenue attached to the action, the value of that paper did not depend so much upon the capital, as on the sum of the interest.” Very just. But were the dividends to stand at 200 livres, without suffering the same diminution as the action? And how was confidence to subsist in a country, where the denominations of both the paper and the coin were at the disposal of a minister?

The diminution upon the paper, by the arret of the 21st of May, raised a most terrible clamour; and Law became the execration of France, instead of being considered as its saviour. He was banished, and reduced to beggary the same day.

What profit could either the Regent, or Law, have reaped from the success of such an operation? Had the coin been raised to 130 livres the marc, no hurt would probably have ensued, and the same effect would have been produced.

Had matters been left without any change at all, no bad consequences would have followed: these existed only in the heads of the French theorists. There was, indeed, twice as much money in bank notes as in coin, in the whole kingdom of France: and what then?

When the Regent saw the fatal effects of his arret of the 21st of May, he revoked it on the 27th of the same month. On the 29th, he raised the coin to 82 livres 10 sols in the marc, and re-established all the paper at its former denomination: but, as Dutot has said, confidence was gone, and was no more to be recalled. Nothing surprises me, but that she lived so long under such rough management.

Dutot, in talking of this augmentation of the coin, on the 29th of May, to 82 livres 10 sols, says, “This operation was consistent with the principles of public credit, and advantageous. They would have done better had they pushed the augmentation to 135 livres the marc; which would have made the specie of France equal to the sum of bank notes.” These are his words, p. 165.

Are not these very sensible principles, coming from a man who has writ a book, which indeed few people can understand, in order to prove the great hurt of tampering with the coin of France?

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CHAP. XXXII. Conclusion of the Missisippi Scheme.

The Regent, persuaded that the blunder of the 21st of May was absolutely irreparable, fell to work next to clear accompts with the company.

He owed them 1600 millions capital, and 48 millions a year of interest upon it.

On the other hand, he had in his possession no less than 400,000 actions, which at 200 livres dividend, which the company was obliged to pay, amounted to 80 millions a year.

How the Regent and the company settled matters, I do not know precisely. This, however, is certain, that by the arret of the 3d of June 1720, the number of 400 000 actions, belonging to the Regent, were burnt; and 24 000 more which had been created by his particular order, the 4th of October 1719, and never delivered to the company, were suppressed.

On the other hand, the company ceded 25 millions a year, of the 48 millions which had been transferred to them.

That sum was constituted anew upon the town-house of Paris, as a fund to be subscribed for by the proprietors of bank notes, at the rate of 2½ per cent. or as the French call it at the 40th penny. (Dutot, p. 168.) In consequence of this, 530 millions of bank notes were subscribed for, and paid in, in the month of June 1720.

After the destruction of the 400,000 actions, the credit of the bank notes languished until the 10th of October 1720.

The object for which they were created was now gone. The whole scheme of transferring the King’s debts upon the company vanished in the conflagration of the actions. What was then to be done?

The bank was at an end: 2235 millions of discredited bank notes in circulation, and a small sum of coin to make them good, was a situation which no authority could long support.

The resolution then was taken to put a final conclusion to this great affair; to bid a long farewel to credit and confidence; and to return upon the old system of rents upon the town-house of Paris; and of coming at money in the best way they could.

We shall now see how this was accomplished; and from that form a pretty good guess at the extent of the fraud committed, with respect to the creditors of France; not so much, I think, from any intrinsic defect in the Missisippi scheme, as from the distress the nation was thrown into, by the ignorance of those who over-ruled John Law in conducting it.

We have seen how the actions were reduced to the number of 200,000; we must now give an account of the deplorable fate of the bank notes.

By the arret of 10th of October 1720, all bank notes were entirely suppressed; and it was declared, that after the 1st of December following, they were to have no course whatsoever.

Here follows the arrangement of this great affair, viz. the liquidation of 2 696 400 000 livres of bank notes as regulated by this arret.

1_mo_, Of the above total of notes coined, 707 327 460 livres. there remained in the bank at that time, for 2_do_, Subscribed for at 2½ per cent. in 530 000 000 June 1720 3_tio_, Carried to the bank by private people 200 000 000 as a fund of credit there 4_to_, Paid in coin by the bank 90 000 000 ————————

This sum of notes was ordered to be burnt by the arret of the 10th of October.

The remainder still in the hands of the public, says the arret, was to the amount of 1 169 720 540 livres, and the King declares, that the holders of them might employ them as follows:

1_mo_, In purchasing the remainder of the 470 000 000 livres. subscription of 25 millions of rents on the town-house of Paris, at 2½ per cent. inde 2_do_, In purchasing a farther sum constituted 00 000 000 on the town-house of Paris, of 8 millions of perpetual annuities, at the rate of 2 per cent. or at the 50th penny 3_tio_, In purchasing a farther sum constituted 100 000 000 on the town-house of Paris, of 8 millions of life-rent annuities, at 4 per cent. or at the 25th penny ———————————— These sums amounted to 970 000 000 Sum above 1 527 327 460 —————————————— Together 2 497 327 460

There still remained outstanding about 200 millions of bank notes.

These were ordered to be disposed of in several different ways, mentioned in the arret of the 10th of October; which it would be needless to mention, as it would require a long explanation to make the thing understood: let it suffice that there was an outlet provided for them, which brought in between 2 and 3 per cent.

Thus we see the conclusion of the whole affair.

At the beginning, the King’s debts stood at 2000 millions capital, and 80 millions interest very ill paid.

At the end of the scheme there had been coined of 2696 millions. notes about Of which in the bank, October 10, 1720 707 mil. And paid in coin 90 —— This substracted 797 millions. —— There remained outstanding in bank 1899 millions. notes[18] Add to this 100 millions still due by the King to 100 millions. the company for the billets d’etat withdrawn in constituting the first 200,000 actions which still subsisted, and for which the company was to receive 5 per cent. So the capital of the King’s debts remained at 1999 millions. Balance gained by the whole operation 1 million. —— Consequently there was little or no fraud as to the 2000 millions. capital

Footnote 18:

There are, however, in France at this day, many persons who are still in possession of large sums of those notes. This makes some people believe, that all the paper was called down without any equivalent given. The reason of those notes remaining, is, that either the proprietors neglected the occasion offered by the arret of the 10th of October, or that they were in hopes that perhaps the bank might again recover its credit. They were mistaken, and the notes are lost.

Let us next examine the state of interest.

The interest at the last was,

1_mo_, Of rents constituted in June 1720, on the town-house, at 2½ per cent. or at the 40th penny 25 millions. 2_do_, Ditto of the 10th of October 1720, at 2 per cent. or at the 50th penny 8 millions. 3_tio_, Ditto at ditto upon lives at 4 per cent. or at the 25th penny 4 millions. 4_to_, Due to the company upon the original stock of 100 millions still paid them at this day at 5 per cent. 5 millions. 5_to_, For the 200 millions of credit at the bank, suppose at the rate of 3 per cent. 6 millions. 6_to_, For the last 200 millions provided for in different ways, suppose at 2½ per cent. 5 millions. 7_to_, Allowed to the company to indemnify them for the loss they sustained by these arbitrary ways of reckoning with them, 80 millions at 5 per cent. still paid them 4 millions. —— 57 millions. The interest at first was 80 millions The interest at last was 57 millions —— Defrauded by the scheme 23 millions a year.

This is (as near as I can guess at it) the state of the French bankruptcy in 1720.

The creditors were robbed of 23 millions a year. I call it robbed, because the interest due to them was diminished by that sum, without their consent, and in consequence of the most arbitrary proceedings; whereas, had the system been conducted with ability, the whole of the debts would have been brought to an interest of 48 millions, instead of 57, and no body would have complained of injustice.

Money likewise might have been brought to 2 per cent. The 1600 millions borrowed of the company at 3 per cent. would then have been reduced to two; which would have brought the 48 millions of interest, upon the whole, to 32 millions: and France, from being reduced to beggary by the King’s wars, would have become the most flourishing state in Europe.

Let us next guess at what may reasonably be supposed to have been the largest sum of coin ever collected in this bank.

I imagine that the far greater part of all the coin supposed to be in France during the Missisippi scheme, remained in private hands, without ever coming into the bank. My reason for being of this opinion is,

Law never could have had more than the value of his original stock, and all the value of notes he had in circulation.

It is absurd to imagine he ever should have had the half, or near it; but let me suppose it,

The bank stock was 6 millions. The notes he issued were 59 millions. —— In all 65 millions.

This is a trifle compared with 1200 millions.

Next for the united bank. The time at which the greatest quantity of coin was collected, must have been when all credit failed, that is, on the 21st of May 1720.

At that time coin was taken out of commerce: every one was forbid to have above 500 livres in possession; and every operation had been used to call it in.

At this time, we know that all the notes coined were issued, except to the value of 461 316 410 livres.

Now we have seen that on the 10th of October following, there were in the bank to the value of 707 327 460 livres.

Let me, therefore, suppose, that from the 21st of May to the 10th of October, the bank paid away in coin, the difference between these

two sums; to wit, 246 011 050 livres. Add to that sum what was then in the bank, viz. 90 000 000 ————————— Sum 336 011 050

This sum is all we possibly can suppose to have been in the bank on the 21st of May, when credit failed.

We must reckon this sum of coin at 82 livres 10 sols per marc, the then value; which makes about 8 146 600_l._ sterling. A large sum, no doubt; but little more than ⅕ of 40 millions sterling, the value of 1200 millions of livres, at 60 to the marc, as has been said. Consequently, either those 40 millions sterling were not then in France, or the greatest part of the sum had remained in private hands during this whole operation.

In this light I see the Missisippi scheme. I may, no doubt, be mistaken in many things: the lights, or rather the glimmerings, by which I have been conducted through this inquiry, must plead my excuse.

But it is not so much facts as principles, I have been investigating through this whole disquisition; and the imperfect account I have been able to give of the former, will at least point out, I hope, the notions which the French nation, at that time, had of the latter. If the contrast between French principles, and those I have laid down, tend to cast any light upon the subject of paper credit in general, my end is accomplished: if they ever prove of use to mankind, I shall not think my labour lost.

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CHAP. XXXIII. Why Credit fell, and how it might have been supported.

I shall now make a few general observations upon the total and sudden fall of credit in France in May 1720: and I shall suggest the means by which, I think, it might have been sustained, even after all the preceeding mismanagement.

Was it any wonder that the French should be astonished at this prodigious revolution, at this immense value of paper on the 21st of May, and at the total discredit of every bit of it the day following?

If there was a value, said they, what is become of it? If there never was any value, how could a nation be so deceived? This phænomenon has puzzled many a head; but the nature and principles of credit furnish an easy solution of it.

In deducing the principles of credit, we have shewn that a permanent and well secured fund of interest is always equal in value to a corresponding capital.

The difference between a permanent and well secured fund, and a precarious and ill secured fund, consists in this, that the first never can disappear, and the other may.

Now the fund, in this case, was at first real and did exist; but it was rendred precarious, by a blundering administration: then credit failed, and in that convulsion, the fund of interest was fraudulently diminished by an act of power.

Had the true principles of credit been understood in France, the bank notes and actions might have been supported, even after the arret of the 21st of May: and all the monstrous value of paper, raised so high by the low rate of interest, might have been preserved: consequently that value, in capital, really existed relatively to the rate of interest.

As the object of the present disquisition into the principles upon which the Missisippi scheme was conducted, is only intended as an illustration of the principles of credit in general; I shall first account for the wonderful phænomenon above mentioned, and then shew how, in the greatest of all the French distress, their credit might have been re-established in a more solid manner than ever.

As to the wonderful phænomenon of the prodigious wealth created by the system, and annihilated in one day, I answer, that there had been no creation of wealth at all, except in consequence of the fall of interest.

1_mo_, We have seen that at the death of the late King of France, the interest of his debts amounted to 80 millions. Was not this a fund which ought to have been made solid and permanent? Will any man say, that a regular plan of paying this interest was a means of creating new wealth? Certainly not.

2_do_, These debts were secured by contracts of constitution of annual rents upon the town-house of Paris: a security taken in the name of a particular creditor, which requires a form of law to transfer.

By the scheme we have been explaining, all these securities were changed: and instead of constitutions of rent, bank notes, in which the King was equally debtor, were given.

Will any man say, that this was the means of either increasing or diminishing the wealth of France? Certainly not. A man who has a good bond in his pocket is as rich before it is paid with bank notes as after: but he has not so much money in his hands; because the bond is not money, and the notes are.

3_tio_, We have said that the interest of the King’s debts amounted to 80 millions a year, at 4 per cent.

We have seen how the company of the Indies were provided with a fund equal to this sum, arising from the 48 millions which the King paid for the loan of the paper with which the debts were to be paid, and from many other lucrative branches of revenue; which instead of being burthensome to the King, were, on the contrary, a means of augmenting his income, by the advanced rent the company gave for the different farms which produced them.

Had the public creditors, therefore, vested their claims in actions, they would, in consequence of that operation, have become sharers in the fund of 80 millions a year, administred by themselves, (and they would then have been the company) open to be improved by trade abroad, and by a good administration at home.

Had this system been carried on in a plain easy way, consistently with common sense, the public creditors would have been paid; the King’s revenue augmented; and it would have been put under a good and a cheap administration.

But when, by the absurd operations of changing the denominations of coin and paper, and wantonly playing with every man’s property, the creditors saw themselves standing on the brink of a precipice; and finding, instead of a good contract on the town-house of Paris, a bank note put into their hands, which might be diminished in its value by one half every month, while at the same time the coin might be raised to double, it was very natural to suppose, that the intention of the King’s ministers was to withdraw from them totally these 80 millions, less or more, to which they were entitled: in which case, there was an annihilation indeed of all the notes; but there was no annihilation of wealth: for in that case, the wealth was still the same, only it was transferred from the creditors to the King the debtor: that is, the creditors were defrauded.

On the other hand, stood the proprietors of the actions sold. These were in use to make a traffic of buying and selling the 200,000 actions which had been in their hands ever since September 1717, when they were first created. For we have shewn, that the posterior creation of actions by the united company, was a mere delusion, as they were all found in the custody of the Regent. The actions, I say, were immediately put into a state of stagnation; because of the discredit cast upon the bank notes, with which it had been usual to buy them.

4_to_, I must observe, that the stagnation of a paper which carries no interest, is equal to a temporary annihilation. The holder then is deprived of the use of his money; and he is not paid for the loss he sustains.

If, therefore, it had been possible to have given a new activity to this bank paper, without allowing it to die away, as it were, in this temporary fit of fainting, credit would have revived: all accompts would have been kept clear, for this is the use of paper money, and so short a shock would hardly have been felt.

But the great damage resulting to the public, upon every occasion of this kind, proceeds from the delay in applying the proper remedy. When any paper is discredited, it immediately falls in its value. The person then who is the original and real creditor for the whole value, and in whose hands the paper is when it suffers the discredit, sells at discount: this is an irretrievable loss to him; and when the paper recovers its credit again, either in part, or on the whole, the profit then belongs to the person who had bought it at discount, and does not go to indemnify the real sufferer.

This was the case with respect to the notes of the French bank: they were allowed to languish from the 21st of May that they were discredited, until the 10th of October, when their fate was decided, as has been said.

Farther, we have seen, that this whole movement of credit had for its basis 80 millions a year, originally paid to the creditors for their interest. This sum answered to the capital of 2000 millions; because at the old King’s death, interest was fixed at 4 per cent.

When, by the operations of the system, all this capital was turned into money, that is, bank notes, the regorging plenty of it made interest fall to 2 per cent. consequently, the capital, which constantly draws its value from the interest paid for it, rose to 4000 millions. We have said that the total value of the paper rose to 6000 millions; but we must reflect, that above 2000 millions of these 6000 millions was in bank notes, and employed in buying of actions. So that both the notes and the actions must not be reckoned as existing together.

Had the Regent sold the actions, he would have burnt 2000 millions of bank notes, and thus the value in paper would have remained at 4000 millions, so long as interest remained at 2 per cent.; and had interest fallen still lower, and dividends remained at 200 livres per action, the value of actions, and consequently of this capital of 4000 millions, would have risen in proportion, just as the value of the capital of the debts of Great Britain rises and falls according to the rate of money; although the same sum of interest be paid to the creditors at all times.

This augmentation, therefore, upon the value of all capitals, during the Missisippi, of lands as well as actions, was in consequence of the fall of interest, and from no other artifice whatever. Lands in France, at that time, sold at 80 and 100 years purchase. [Dutot, Vol. II. p. 200.]

When credit failed, and when all the circulating paper was thrown into a state of stagnation, interest rose, in proportion to the deficiency of the supply for the demands of borrowers. The value of capitals then diminished. But this might have happened from another cause, had there been no bankruptcy, or intention to defraud the creditors: a war might have produced it; or any circumstance which might have raised the rate of interest.

The rise, therefore, upon capitals, from the fall of interest, I consider here as no acquisition of wealth: I reckon wealth to be that which is the annual produce of the capitals.

So much for the resolution of this wonderful phænomenon.

I must now shew that in the height of the distress, the confidence of the public was still to be regained, and credit recovered, even after the fatal arret of the 21st of May 1720.

I lay it down as a principle, that whoever has a sufficient fund, and pays interest regularly for the money he owes, runs no risk of losing his credit.

So soon, therefore, as the Regent found that by his arret of the 21st of May, all credit had disappeared; had he, upon the 27th of the same month, or at the time he raised the coin to 82 livres 10 sols per marc, ordered all bank notes presented to the bank, either to be paid in coin, or marked in the books of the bank as bearing interest at 2 per cent. I say, credit would not have suffered in any comparison to what it did. No body then would have sold a note at discount; and had it been necessary, he might have ordered the interest to be paid monthly.

The authority I have for this opinion is Dutot, who says, that upon opening the subscription of 25 millions in the month of June, the notes fell in their value 11½ per cent. only.

Now the rate of this subscription was at 2½ per cent. as we have seen; consequently, if 100 livres of notes lost but 11½ per cent. they were worth 88½ livres in coin; but these 100 livres in notes were worth 2½ per cent. because the subscription was open at that rate: consequently 88½ livres in coin was also worth 2 livres 10 sols per annum: consequently interest, at that time, was at 2.825 per cent. that is, below 3 per cent. even after the bankruptcy.

Where then was the great harm? Where was the occasion to fly immediately to the destruction of actions, which were in the Regent’s own hand? A little patience, and good management, would have set all to rights.

I would, therefore, have left the notes in circulation under this regulation, viz. that such as should be presented to the bank should have had a transfer of 2 per cent. paid quarterly; or a value, in actions, at 10,000 livres per action; which is the capital answering a dividend of 200 livres at 2 per cent. at the option of the holder: and in case interest had come to fall still lower, the price of actions might have been augmented.

I would have set before the public a full and exact account of the company’s funds. I would have banished all mystery from the affairs of credit. I would have registred a declaration in parliament, setting forth,

1_mo_, That all future changes either upon the denominations of paper or coin, were contrary to the maxims of good government.

2_do_, That all stipulations between the King and his creditors were to be inviolable. And,

3_tio_, That the parliament of Paris should for ever remain invested with an exclusive right to watch over those regulations in time to come; and I would have bound the parliament by a special oath for that purpose. I would even have had the King to take the same oath: and he might have ratified it at his coronation in 1725.

By these steps I should have vested a new power in the Kings of France which they never had before: a power of having money from their subjects, from their allies, and from their enemies: a power they have not, nor ever will have, until the principles of credit be better understood among them.

Had such a plan been followed, I have not the least doubt, but that, 1. The actions would have been sold at a very great advanced value above the standard of 5000 livres, at which the Regent had bought them: 2. That money would have come back to 2 per cent. and then, 3. Had banks been established upon a proper plan, ease, with industry, would long ere now have appeared in every corner of that kingdom.

How infinitely more easy would it have been to establish such a plan in 1720 than at present? At that time the most difficult part of the whole was executed. The creditors had taken notes for their claims: the credit then was given. There was nothing to be done but to support it. The creditors were then at the mercy of the state: at present the state is at the mercy of the creditors. Were such operations on coin to take place at present, as were then familiar; were the King at present to attempt to turn the constitutions of rent, perpetual and life-annuities, into any other form than what they have, the credit of France would be undone for a long time; and who knows what views of ambition a situation so deplorable might not stir up in certain courts of Europe.

What state would pay its debts, if it durst do otherwise? And what state can diminish its debts in any other way than by lowering the interest upon them? But of this more in the proper place.

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CHAP. XXXIV. How the diminishing the Denomination of the Paper in Circulation, by the arret of the 21st of May 1720, destroyed the Credit of France, when the same arbitrary Measures taken, with regard to the Coin, had produced no such Effect.

This question is curious, and I shall endeavour to resolve it in the best way I can, before I conclude this subject.

The first thing to be done is to point out the immediate effects which resulted upon diminishing the denomination of the paper; because the destruction of the credit of France was not the immediate consequence of this arret; but the ultimate effect of a chain of consequences which followed indeed very quick upon one another.

The paper had been declared, against the opinion of Mr. Law, by an Arret de Conseil of the 22d of April 1719, une monnoie fixe, as has been said. Consequently, any diminution of its denomination was a plain infraction of the public faith. From this declaration in the arret of the 22d of April 1719, the public reaped one notable advantage, which was, that in borrowing and lending paper, every one was sure that the obligations contracted could be dissolved by restoring the very same species of property which had been received; but by diminishing the denomination of it, by the arret of the 21st of May 1720, all such as were debtors, became obliged to discharge their debts at the expence of double the sum of paper borrowed.

The immediate consequence, therefore, of touching the denomination of the paper, was, to shew the public that their fortunes in paper were liable to the same inconveniences as fortunes in specie; that is, that they might be increased or diminished at pleasure. Upon this it was very natural for every one to endeavour to realize his paper, and put it into coin: since, in pari casu, it was better to have it in that which had some intrinsic value, than in that which had none at all.

Of all the French paper, the notes were the most easily realized; because there was contained in them a direct obligation upon the bank to pay them in coin. The actions again were more difficult to be converted; because in order to realize them, it was necessary to find people who were willing to give either notes or coin for them.

A run upon the bank, therefore, taking place, upon the arret of the 21st of May, it was obliged to stop payment: this occasioned a general alarm, and destroyed the confidence which the public had had in the state, which is what we mean by public credit.

This point explained, it remains to shew why the augmentations and diminutions upon the specie should not have ruined the credit of the paper.

1_mo_, The operations upon the specie affected the paper only indirectly; but the diminution upon the paper affected it directly.

The operations upon the specie only affected that part of the paper which was made to circulate as an equivalent for the specie; or in other words, that part which people realized, either, 1. with an intention to withdraw their funds altogether out of the scheme; or 2. to profit of the operations upon the specie; or in the last place, to procure small sums of money for common expences.

Now as to the first, the number of those who wished to withdraw their stocks were inconsiderable, in proportion to the stock-jobbers; and therefore their interest could not affect the general credit; and the last was inconsiderable in every respect.

As to the second, the government made it very difficult for the proprietors of notes to profit of the operations upon the coin. When it was to be diminished, the diminutions were advertised some time before they took place, and the diminution went on always by degrees. Thus people who had paper, with which they could trade in buying actions, constantly rising in their value, by the intrigues of the state, when at the same time the denominations of the coin were diminishing, did not carry their notes to the bank for two reasons.

The first, that the paper really gained by every diminution upon the denomination of the specie, in an exact proportion to the diminution. A livre in a bank note, while the specie was diminishing by intervals from 80 livres the marc to 65 the marc, gained regularly in the hands of the possessor; whereas had he realized at any period but the last, the subsequent diminutions upon the specie he had acquired with his paper would have affected the value of it.

The second was, that by realizing he deprived himself of the profit of stock-jobbing.

The only way, therefore, for the proprietors of the paper to gain by the operations of the state upon the coin, was to guess the time when the coin was to be raised in its value: but this was impossible; for the rising was sudden and unexpected; whereas notice was constantly given of the fall, at some distance of time.

For example, the money was suddenly raised the 5th of March 1720, from 60 livres to 80 livres the marc; and the 11th of the same month, notice was given, that on the 1st of April following, it was to be brought down again to 70 livres per marc; and on the first of May following, to 65 livres. The consequence of this was, that from the 11th of March, people were glad to carry money to the bank for notes, which were to stand at the same denomination, whereas the silver was to diminish on the 1st of April.

Accordingly a great sum, above 44 millions, was brought in during this interval.

When the 1st of April came, and that the silver was brought to 70 livres the marc, those who were in possession of the paper, were still prevented from realizing; because of the future diminution which was to take place. When this term was come, people had reason to imagine that the silver would for some time stand at 65 livres the marc; consequently, there was more to be gained in stock-jobbing with the notes, than in realizing them in specie, which, in order to make profit of it, must have lain dead until a new augmentation; which was a very uncertain event. In short, there was no run upon the bank from the 1st to the 21st of the month of May, when the famous arret in question was given. Then indeed the run came on with violence, and payment was stopt.

2_do_, The second reason why the effects were different when the state changed the denomination of the coin, from what they proved to be when the denomination of the paper was changed, I take to be this,

That in France the operations upon the coin had been familiar; and were expected by every body: and, perhaps, the very making the paper a monnoie fixe, had for this reason added to the credit of it. A most surprizing thing! The state took care always to gain, whether they raised, or whether they diminished the value of the coin. The stock-jobbers, therefore, never minded the coin at all. If they could profit by an augmentation by foreseeing it, they realized; if they could see a diminution before notice was given of it, then they bought paper.

The operations on the coin principally affected such as were either respectively debtors or creditors, to people who were obliged to pay, or to receive their debts in specie; or who had a fixed revenue specified in a number of livres. There the disorder was great, as has been frequently observed.

3_tio_, The operations upon the specie never could destroy the intrinsic value of it, however they might prevent the circulation of it for a fixed legal denomination; therefore it remained under all combinations of circumstances, a thing valuable to be acquired; and it still remained a commodity, desireable by all, and was therefore constantly demanded.

But a discredit cast upon the paper had a different effect. The value there depended entirely upon the will of the state, and every body saw that it was as easy to annihilate it, as to reduce it to one half. The discredit, therefore, had the effect of stopping the demand for it, that is, the currency; consequently, a run upon the bank immediately took place.

4_to_, The rendring the value of the paper precarious, made every possessor of it seek to realize it without delay. The proprietors of the bank notes ran to the bank; and a run upon the bank, at a time when it could offer payment for the notes in no other value than actions, was a declaration of bankruptcy. Now it was the run upon the bank; it was this claim which the subjects had a right to make upon the bank, for which the King was guarantee, which destroyed the credit of France; and it is very evident that no operation upon the specie could possibly produce any such effect[19].

Footnote 19:

It was a capital mistake in this diminution upon the paper to make it gradual. Was it not evident that every mortal would seek to realize a note which was to diminish in its value progressively every month? A note worth 10,000 livres, for example, the 22d of May, was immediately reduced to 8000 livres, and the 1st of July, was to be worth only 7500. This was plainly solliciting a run upon the bank. The stroke should have been struck at once.

In short, had this operation upon the paper been suspended for a few months; had the people of France been indulged in a little more time, their infatuation in favour of the actions would have carried them to employ all their bank notes in the purchase of those which remained in the hands of the state. By this operation the far greater part of the notes might have been withdrawn and destroyed, and when the bank found themselves in a situation to answer the call of all those which afterwards remained in circulation, then the state might have boldly ventured to diminish the price of actions: because if that stop had occasioned a run upon the bank for the outstanding notes, there would have been coin enough to answer them at their full value; and this would have confirmed the credit of the bank more than any thing.

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CHAP. XXXV. _How a Bank may be safely established in France, as Matters stand at present._

The prerogative of the Kings of France is limited by no written law, because he is acknowledged to be the legislature of his kingdom; and the exercise of his power is only limited by maxims of state. The first of which is, that he is to govern according to his laws, and not according to his ambulatory will.

Now, in making of laws, the parliament have a sort of negative, de facto; because the whole regular and legal execution of every law is committed to them: and if they refuse to register it, they refuse to execute it; and a law without execution is, in fact, no law at all.

When the King’s will can be carried into execution by a single act of power, the authority of parliament is of no effect in preventing it. When this requires a train of systematical administrations, the concurrence of parliament, who hold the whole regular execution of the laws, is absolutely necessary.

Banks of deposit and of circulation, stand, it must be confessed, upon a very precarious footing, under such a government.

An order from the King is at any time sufficient to command any deposit of specie which can be made within the kingdom. While this is the case, no paper can have any solidity, which draws its security from such deposit.

Coin, therefore, must be banished from all banks in France: and the use of them should be entirely limited to that of an office, for the keeping of reckonings between people who have solid property, and who may want, on a thousand occasions, to melt it down in favour of consumption, trade, industry, agriculture, or the like.

In this light, a general bank may be established at Paris; and branched out over the whole kingdom. The stock of it should consist in land property, engaged unalienably, to make good the engagements of the bank.

Notes should be issued upon solid security, bearing no interest while they circulate as money; and when they return upon the bank, either the original securities may be withdrawn, or payments might be made by the transfer of a corresponding perpetual interest.

Every province, every considerable city in the kingdom, should be allowed to be interested in such a bank: and in every considerable city, there should be an office for transacting such credits, and for regularly receiving all payments of interest. If the King should think fit to allow his mint to supply coin, or bullion, for bank notes presented, at a determinate premium, he might by this operation advance the commercial interests of his kingdom, in facilitating the payments of a wrong balance of foreign commerce: but without that regulation, the bank will be perfectly sufficient for promoting and supporting domestic circulation. Every one who is able to give security for a certain interest, will be sure to find money: and as the expence of conducting such a bank will be very small, the interest for money will be very low.

As I said before, a bank of this kind would be no more than an office, appointed for keeping accounts between people who are possessed of any paper secured upon real and solid property: and farther, in the beginning, at least, I would not advise to carry it.

The general accompt of the bank would appear in a few articles, viz. Credits given, so much; inde of interest to be received, so much.

Notes returned, so much; inde of interest to be paid, so much; balance in favour of the bank, so much.

A bank of this nature would answer every purpose for promoting industry and domestic circulation.

Such a bank must neither issue, or ever receive coin in payment.

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CHAP. XXXVI. Of Banks of deposit and transfer.

I now dismiss the subject of banks of circulation. The unspeakable advantages drawn from this institution, when properly regulated, in supplying money at all times to those who have property, for the encouragement of industry, and for improvements of all sorts, and the bad consequences which result to society, from the abuse they are exposed to, has engaged me, perhaps, in too long a discussion of particular combinations of circumstances relating to them.

I now come to treat of banks of deposit or of transfer of credit: an institution of the greatest utility for commerce.

These two species of banks differ essentially in two particulars.

1_mo_, That those of circulation serve the purpose of melting down unwieldy property into money; and of preserving the quantity of it at the proportion of the uses found for it. Those of deposit, are calculated to preserve a sum of coin, or a quantity of precious moveables, as a fund for carrying on the circulation of payments, with a proportional value of credit or paper money secured upon them.

2_do_, In the banks of circulation, the fund upon which the credit is built, is not corporeally in the custody of the bank; in the other it is.

The fundamental principle, then, of banks of deposit, is the faithful preservation of the fund delivered to the bank, upon which credit, in money, is taken for the value.

If at any time a bank of deposit should lend, or should, in any wise, dispose of any part of this fund, which may consist of coin, bullion, or any other precious moveable, once delivered to them, to the end that a credit in money may be writ down for it in their books of transfer, in favour of the depositor, and his assigns; by that act, the bank departs from the principles upon which it is established. And if any bank is established which, by their regulations, may so dispose of the fund of their credit, then such a bank becomes of a mixed nature, and participates of that of a bank of circulation.

These things will be better understood by reasoning from an example of a true bank of deposit.

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CHAP. XXXVII. Of the Bank of Amsterdam.

Many authors have written concerning this great bank of deposit: particularly, Davenant, Sir William Temple, Ricard, in his Traité de Commerce revu par Struyk, the author of the Essay sur le Commerce, and Mr. Megens, in his book, which has been translated into English, under the title of The Universal Merchant.

In these authors we find a number of facts, which I shall combine with my own informations, and here apply principles to them; in order to communicate a distinct idea of this establishment. A detail of its particular operations regards practice, and falls not within my subject.

The original intention of the States of Holland, in establishing the bank of Amsterdam, was to collect a large capital in coin within that city, which might there perpetually remain, buried in a safe repository for the purposes which we are now to explain.

In order to accomplish this plan, they established the bank upon the 31st day of January 1609.

The method they fell upon to collect the coin, was to order, that all bills of exchange, for any sum exceeding 300 florins, should be paid in specie to the bank; and that the holder of such bills should, instead of receiving the coin, have the value of it writ down in the books of the bank to his credit, at his command, to be transferred to any person he should appoint; but never more to be demandable from the bank in specie.

By this operation, the mass of coin circulating constantly from hand to hand, between the merchants of Amsterdam, began, by degrees, to be heaped up in the bank; and as the heap augmented, so did the sum of credit augment upon the books of the bank.

It is evident, from this change in the mode of circulation, that no loss could be incurred from the locking up of the coin.

As long as coin is in a state of constant circulation, it can produce no interest to any person. Interest commences from the moment the coin begins to stagnate; that is to say, so soon as it comes into the hands of one who has no ready money demand upon him. When this happens the proprietor lends it at interest.

Now the credit in the books of the bank, which is every day transferable at the bank, answers every purpose of coin, either for payment or loan: and the proprietor has neither the trouble of receiving the species, nor any risk from robbery, or false coin.

The first advantage the city reaped from this institution, was, to secure the residence of trade in that place.

Capitals transferable only at the bank, laid the proprietors under a necessity of fixing their dwelling where their funds were, and where only they could be turned to accompt.

It had another excellent effect in commerce: it pointed out the men of substance. A credit in bank is no wise equivocal: it is a fund of undoubted security.

From the constitution of this bank we may form an estimate of the extent of the deposit.

It can only swallow up a sum equal to what is necessary for circulating the payments of the city of Amsterdam. Were a sum exceeding that to be shut up in the bank, and were the credits written in the books of the bank to exceed that proportion, it is plain, that the value of the bank money would sink immediately. The reason is obvious: the credits transferable are of no use to those who have no occasion to transfer; that is, to pay, lend, or exchange at Amsterdam. So soon, then, as all the demand of Amsterdam is satisfied, the proprietors of the overplus will seek to realize their superfluous credit, in order to invest the value arising from it, in some other place where a demand may arise.

In order to realize, they must sell their bank credit for coin; because the bank pays only in transfer. Coin then would be demanded preferably to credit in bank; consequently, coin would rise in its proportional value to bank money, or bank money would lose, which is the same thing. This fluctuation between bank money and coin, leads me to explain what is called the agio of the bank.

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CHAP. XXXVIII. Of the Agio of the Bank of Amsterdam.

We have pointed out one motive for establishing a bank of deposit at Amsterdam, viz. that of fixing the residence of trading men in that city.

Another was, to prevent the inconveniencies to which a small state was exposed, by the introduction of bad coin, from all the neighbouring countries in Europe, with whom they traded.

In the territory of Holland there are no mines of gold and silver; consequently all they have comes from other countries, as the return of a favourable balance upon their commerce.

At the time the bank was established, the republic was in a state of infancy; and any coin they had, was that of their old masters the Spaniards. This was unequally coined; many pieces were light; many had been clipped and washed. As they extended their traffic, they were obliged to receive great quantities from Germany, which was still worse.

In order then to prevent the circulation of such coin, and the perplexities occasioned by it in all accounts, they established a bank, and fixed the standard upon a silver coin called the ducatoon, to which they gave the denomination of 3 florins or guilders bank money.

But as this coin also was unequal, like all the rest of the specie in Europe, before the introduction of milled coin, and the policy of weighing piece by piece at the mint, the bank appointed the ducatoons to be received in bags of 200 pieces, weighing together 26 marcs 5 ounces 10 engles of Amsterdam troes, or gold weight; which being reduced to aces, (the lowest denomination in this weight) make 136,640 aces. This divided by 200, gives, for the weight of 1 ducatoon, 683.2 aces.

Let us now convert these aces into troy grains, according to the proportion established between Dutch aces and troy grains, in the last chapter of the third book.

The equation will stand thus,

5192.8 aces, being equal to 3840 troy-grains, 683.2 aces, therefore, will equal 505.21 troy-grains; which, consequently, is the weight of a ducatoon, or of 3 florins bank money of Amsterdam.

Next as to the fineness of this coin:

The ducatoon was coined, according to the imperial standard, of 14 loots 16 grains fine: that is to say, it is 268⁄288 parts fine, and 20⁄288 parts alloy.

To find, therefore, the number of Hollands aces, and of troy grains of fine silver in the ducatoon, state the two following proportions:

288 : 268 :: 683.25 : 635.75 aces fine. 288 : 268 :: 505.21 : 470.13 troy-grains fine.

In the last place, if we divide the number of aces, and troy grains fine in the ducatoon, by 3, we shall see the exact weight of fine silver in 1 florin of Amsterdam bank money.

635.75⁄3 = 211.91 aces, and 470.13⁄3 = 156.71 troy-grains fine.

These calculations premised, it would be an easy thing to fix the exact par of the metals, between sterling and bank money of Amsterdam, were the British coin of legal weight, and were the metals there rightly proportioned. But is it to be supposed, that any person who has bank money of Amsterdam, would exchange, at the par of the metals, with sterling silver, which is many per cent. too light, or against English bank notes paid in gold, always overrated with regard to the silver, and often too light also?

While, therefore, the coin of Great Britain stands upon the present footing, all calculations of the par of exchange, as it is commonly computed, upon the intrinsic value of the coins of other nations, must be delusive and of no utility whatever.

For the sake of giving an example, however, here is the real par of the two currencies, upon silver sterling coin of full weight.

One pound sterling should contain, as has been said, of fine silver 1718.7 troy grains, and contains 240 pence sterling: state, therefore, the following proportion, and you will find how many pence sterling one florin of Amsterdam banco should be worth.

1718.7 : 240 :: 156.71 : 21.883.

Thus 21.883 pence sterling is exactly the real par of an Amsterdam florin banco, supposing sterling money to be silver, at the full weight.

The florin bank money being regulated upon the ducatoon, an old species not now coined, the fineness of the silver was determined; and the weight of the 200 ducatoons being determined also, this regulation determined the weight of single pieces, and fixed the standard of the florin banco, in weight and fineness.

The current money in Holland, coined by the state, is the florin of 200.21 aces fine, as we have seen in the last chapter of the preceding book.

So soon as the state coined their current florins at 200.21 aces, it is evident, that the ducatoon, which contains three times 211.91 aces, must rise in its value. Accordingly, the piece which was in bank money, 3 florins, became 3 florins 3 stivers current money.

This difference is what is called the agio of the bank of Amsterdam.

From this it appears, that the advanced value of the bank money above the current money of Holland, is not owing to the great credit of the bank, as some imagine, but to the superior intrinsic value of the coin upon which the standard of the bank money is fixed.

Let us next determine the exact difference between the bank and the current money, which difference I shall call the intrinsic agio: for this purpose state this proportion;

200.21 : 211.91 :: 100 : 105.84

From which it appears, that the bank money is 5.84 per cent. intrinsically better than the current money of Holland.

We have seen in the chapter referred to, in what a confused state the Dutch coin is at present, and how it becomes a science to comprehend any thing concerning it. For this reason it is, that the regular agio of the bank money of Amsterdam is always supposed to be 5 per cent. Farther,

The ducatoon, upon which it is regulated, passes for 3 florins 3 stivers, which is just 5 per cent. better than 3 florins, at which it was rated when the bank was established; but most of the coins which circulate are light.

Those who conduct the affairs of the bank, have now lost sight of this original coin, which is rarely found circulating, in considerable sums; and they consider the florin according to its intrinsic worth of 211.91 aces of fine silver; and as the value of silver varies, they publish regulations for receiving coin, such as Spanish dollars, French crowns, &c. according as they find the proportion of their worth in bank money: and compounding the value of gold with the value of silver, they make the same regulations as to gold.

I have insisted too long already upon the subtilties of the variations in the proportion between gold and silver, to take it up again in this place. My intention is to explain the principles upon which this great bank of deposit is established, and not to descend into a detail of the mechanism of their adapting the variable coins of Europe to their own standard.

I have said, that the sum of credit, written in the books of the bank, is in proportion to the quantity of bank money necessary for circulating the trade of Amsterdam.

Consequently, as this circulation increases, the demand for bank money increases also.

Again; in proportion as the demand for bank money increases, the agio rises; and on the other hand, as the demand for current money increases, the agio falls.

Thus we saw in the last war, ann. 1760, 1761, 1762, that agio was below 5 per cent. The reason was plain. The great circulation carried on in Amsterdam was considerably directed towards the uses of the war. There bank money was of no use; coin only could serve the purpose. Accordingly agio fell to —— per cent. and as gold was much more easily transported than silver, that metal rose ¼ per cent. above the ordinary proportion of 1 to 14½.

Demand regulates every thing; and this demand makes the agio fluctuate; sometimes rising above, and sometimes falling bellow 5 per cent.

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CHAP. XXXIX. _Continuation of the same Subject; and concerning the Circulation of Coin through the Bank of Amsterdam._

Hitherto we have represented this bank as a gulf, which is calculated to swallow up the coin of Europe; without having pointed out any faculty of throwing up a part of the treasure so secured, in case of an overcharge.

This has appeared a mystery to many, and a defect in the constitution of the bank.

But when the principles upon which it is established come to be compared with some branches of their administration, which are publicly known, perhaps the mysterious part may be unravelled. And although I do not pretend to give an entire satisfaction as to every minute particular, I think I can shew how, and to what extent, the treasure may circulate, so as to occasion no abuse, either from the hoarding it on one hand, or from the dissipation of it, for the service of the state, on the other: and if all these conjectures shall be found to hang together, and appear consistent with principles, without being contradicted by any known fact, then I may conclude, that such a system of banking as I describe, is at least a possible supposition, whether it exactly coincides with that of Amsterdam, or not. And who knows but my speculations may enable some person of more knowlege and more sagacity than I am possessed of, to render this curious operation of credit still more generally understood than hitherto it has been.

I have shewn how the agio rises and falls, according to the demand for bank money.

So long, therefore, as the agio does not fall below the difference between the value of the two currencies, it is a proof that all the credit writ in the books of the bank does not exceed the uses for it: consequently, the coin locked up, which never can exceed the credit on the transfer books, and which, were it not locked up, could be of no more service than the credit itself, in circulating the trade of Amsterdam, does not exceed its due proportion: consequently, it is not hurtfully withdrawn from commerce; consequently, no abuse is implied from the hoarding of it.

But let me suppose a case, which may happen; to wit, that for a certain time, the trade of Amsterdam may demand a larger supply of credit in bank, than is necessary upon an average. Will not this raise the agio? No doubt. If the agio rises so high as to afford a premium upon carrying coin to the bank, upon the footing of their own regulations, this will augment the sum of bank credit; because the money so carried to the bank, becomes incorporated with the bank stock; the value is writ in the books of the bank; and when this is done, the coin is locked up for ever.

If then it should happen, that the trade of Amsterdam should afterwards diminish, so as to return to the ordinary standard, will not this overcharge of credit depress the rate of bank money, and sink the agio too much below the par of the intrinsic value of the two currencies?

To these difficulties I answer, like one who, being ignorant of facts, which I never could get ascertained by any person in Holland to whom I had access for information, and which remained hid from most people in the deep arcana of Amsterdam politics, must have recourse to conjectures, founded upon natural sagacity.

First then, The city of Amsterdam knows, from long experience, the rate of demand for bank money; and it is not to be supposed, that upon any sudden emergency, which may heighten that demand for a time, they should be such novices as to increase the credit upon their books so far, as to run any risk of overstocking the market with it; especially as, on such occasions, the deficiency of bank credit might be supplied with coin, constantly to be found in the city of Amsterdam, as we shall explain presently.

Farther, Who will say, that there does not reside a power in the managers of this bank, to issue coin for the superfluous credit, in case that, in spite of all precautions to prevent it, a redundancy of bank credit should at any time be found upon their books?

It is very true, that no person, having credit in bank, can demand coin for such credit; and as no demand of that sort can ever be made, it is very natural to suppose, that a redundancy of coin and credit can never be purged off.

During my stay in Holland, I was at great pains, to no purpose, to discover whether ever the bank issued any part of their credit cash upon any such occasions. Every one I conversed with was of opinion, that if ever any coin had been taken from the treasure of the bank, it must have been by authority of the states, for national purposes: a step conducted with the greatest secrecy; and the matter of fact, I found, was extremely doubtful. But this is nothing to the present purpose. That the coin may be disposed of, I allow, though I do not believe it; but how is the superfluous credit, writ in the books, to be disposed of? There lies the difficulty.

The popular opinion is, that coin has been taken out for the service of the state: the opinion of many intelligent men is quite contrary.

I am now to give my opinion, not only as to this point, but upon the main question; and this not from information, but from conjecture; which I shall humbly submit to the better judgment of my reader.

My opinion then is, 1_mo_, That every shilling written in the books of the bank, is actually locked up, in coin, in the bank repositories.

2_do_, That although, by the regulations of the bank, no coin can be issued to any person who demands it in consequence of his credit in bank; yet I have not the least doubt, but that both the credit written in the books of the bank, and the cash in their repositories which balances it, may suffer alternate augmentations and diminutions, according to the greater or less demand for bank money. If I can prove this, all difficulties will be removed.

My reasons for being of this opinion are,

1_mo_, From principles, I must conclude, that if, upon any occasion whatever, even when the smallest demand for bank money, and the greatest demand for coin takes place, there was an impossibility of producing the least diminution of bank credit, or of procuring any supply of the metals from the bank, the consequence certainly would be felt, by an extraordinary fall in the value of bank money; or which is the same thing, in other words, by an extraordinary rise in the value of the metals, when compared with bank money.

Now, this is a case which never happens. Variations upon the rate of agio, of 2 or 3 per cent. perhaps more, are frequent and familiar. The demands of trade, for coin or credit, are so fluctuating, that such variations are unavoidable; but were there an overcharge of bank credit, which no power could diminish, that overcharge would quickly be perceived; because the fluctuations of the agio would entirely cease; as the balance of a scale, nearly in equilibrio, ceases from a total overcharge on one side.

2_do_, My second reason is founded upon a matter of fact, which I must now apply.

There are upon the square before the town-house of Amsterdam, (the place de Dam) between 10 and 11 in the morning, a number of cashiers, whose business it is to buy and sell bank credit, for current coin. They bargain with all those who have occasion either to buy or sell; and according to the demand for specie, or bank credit, the agio rises or sinks: and as these cashiers must constantly gain, whether they furnish bank credit or current coin, since they are never the demanders in either operation, it is commonly found, that there is in their favour about 1⁄16 per cent. or perhaps ⅛ per cent. according to the revolutions in the demand: that is to say, one who would first buy specie, and then sell it, would lose ⅛, or perhaps but 1⁄16 upon his operation.

From this circumstance of buying and selling of bank credit with coin, and vice versa, I think I can resolve the mystery mentioned above, viz. how the constant accumulation of coin in the bank of Amsterdam, should never have the effect of depreciating their bank money, by augmenting, beyond the demand for it, the quantity of their deposit, and of the credit written in their books.

It is a matter of fact, that the bank lends both coin and credit to the brokers, cashiers, or lombards, who are constantly found on the place de Dam.

Whenever, therefore, the bank finds that agio falls too low, with respect to the coin; and when, in consequence of that, the demand for coin increases; then they lend coin out of their repositories to the brokers; and when it rises, they lend credit.

This coin the brokers dispose of to those who have bank money, and who want to convert it into coin. They sell the coin for bank credit: the purchaser writes off the transfer in favour of the broker, and he again repays the value of the coin to the bank, by transferring the credit he obtained for the coin, in favour of the bank.

This done, the bank may expunge this credit from their books; by which means their deposit of coin is diminished, and also the sum of credit which was found superfluous.

If, on the other hand, the circulation of the trade of the city should, in a short time afterwards, begin to increase, those who have coin, which in that case would not so well serve the uses of circulation as the bank credit, come with it to the brokers, who sell them bank credit for it; this coin the brokers deliver to the bank, which writes off the credit lent to the broker, in favour of him who has paid his coin for it.

This is, as far as I can guess, the nature of the circulation of the coin in the bank of Amsterdam.

It is a curious method of preserving an exact proportion between the coin in deposit, the credit written in their books of transfer, and the demand for bank money.

The plan is quite consistent with principles, and checks exactly with those matters of fact which are known to all the world. Whether the operation be conducted exactly in the way I have represented it, or not, is a matter of small consequence to us, who aim at nothing more than the investigation of the principles upon which such operations may be conducted.

When we compare this operation with those of the bank of circulation, which we have already explained, we find a great analogy between them.

We have seen how the notes issued by banks of circulation increase and diminish according to demand: and now we see how the same principle operates in banks of deposit, which issue no coin on demand. In the first case, the mass of securities, or coin of the bank, is diminished, without the consent of the bank, by the act of their creditors; that is, the holders of the notes. In the last case, the creditors, or persons who have credit in bank, cannot, by their own act, diminish the quantity of the coin deposited, nor of the credit written; but the bank itself, by the help of those interposed persons, the brokers on the place de Dam, is enabled to preserve an exact balance between bank money and the demand for it; augmenting it as it is demanded, and diminishing it when it is found to regorge.

From this I conclude, that the treasure of the bank of Amsterdam is not near so great as some authors, from mere conjecture, have asserted.

The author of the Essay on commerce, reckons it at four hundred millions of guilders; and the Amsterdam edition carries in the margin a correction, which gives us to understand, that it amounts to between eight and nine hundred millions. Davenant esteems it at 36 millions sterling. Mr. Megens, an author of great judgment and sagacity, esteems this treasure at no more than about 60 millions of guilders, or about 5,500,000_l._ sterling; a sum (says he) wherewith great things may be done. Univers. Merchant, sect. 61. I agree entirely with him, that for the ready-money demands of the trade of Amsterdam, that sum, constantly in circulation, may go a great length.

What has misled most people in their estimation of this treasure, is the appearance of a constant accumulation, without any restitution: but that there is a constant egress, as well as ingress of coin to this bank, I think I have rendred pretty evident.

Besides the permanent credit written in the books of transfer, concerning which we have been speaking, the bank of Amsterdam receives, in deposit, vast sums of coin every year, which are not incorporated with the bank treasure, but remain in the bags in which they are delivered, under the joint seals of the bank and of the person who delivers them.

This operation comes next to be explained.

The trade of Holland draws a constant flux of coin and bullion into the country; and that trade sends a constant flux out of it. The establishment of the bank of Amsterdam renders the use of this coin and bullion, upon many occasions, superfluous, as money.

It therefore remains as a commodity, the value of which rises according to exigencies, or the demand for it.

When the precious metals come from Spain, Portugal, and other nations, who owe a balance to the Dutch, they are lodged in the bank of Amsterdam in the following manner.

The proprietors carry them to the bank in sacs composed of a determinate number of pieces, and the sac must be of a determinate weight, according to the regulations of the bank, from time to time; for which the bank writes off credit in bank, at certain rates, according to the coin lodged, to the account of the proprietor.

But as this coin is received, upon condition that it may be drawn out again, so soon as the depositor shall demand it; instead of writing off the whole value upon the books of the bank, they only write off a certain part, (suppose 90 per cent.) and for the remaining 10 per cent. they deliver what they call a recipisse, which is an obligation by the bank to re-deliver, upon demand, the individual sacs, sealed with the seals of the bank and of the depositor. This recipisse is transferable at the will of the person to whom it is delivered. Farther,

He who has put his coin so in deposit, becomes bound to pay to the bank ½, ¼, or ⅛_per cent._ every six months, according to the coin: that is, upon gold ½ per cent. on pieces of eight and rix-dollars ¼; on ducatoons ⅛ per cent. and in case he neglects so to do, then the coin becomes consolidated with the treasure of the bank, and can no more be drawn out, in virtue of the recipisse.

This being performed, the depositor may transfer, at will, all the 90 per cent. of his credit, in the course of his business; and so soon as the value of coin rises in the market, he must fill up his credit in bank to the full value of the 90 per cent. and then presenting his recipisse, he receives back his own individual coin, sealed with his own seal, as when at first delivered.

If he finds that it is either inconvenient for him to fill up his credit, or that he has no occasion for his coin, upon the rise in its value, he may then sell his recipisse to another, who has credit in bank equal to the value of the deposit; and he, in virtue of the recipisse transferred to him, withdraws the coin, as the person might have done who put it in deposit.

The recipisse itself, which is what gives a right to the coin to any one who is the proprietor of that paper, and who has credit in bank for the sum contained in it, rises and sinks in its value, according to the price of the coin to which it carries a right.

In this manner coin, which otherwise would be dead in a warehouse, is made to circulate, in favour of the owner, during the deposit, remaining at the same time always at his command; and the keeping of the coin brings into the bank a small profit, but which, by constant accumulation, becomes considerable.

I have said above, that the bank of Amsterdam puts forth, from time to time, what regulations they think fit, as to the rate at which they receive the different species of coin. These regulations are formed according to the fluctuation of the value of the metals. When silver rises above the proportion it had before, with respect to gold, then the silver species is received at a higher rate than formerly. When gold rises in proportion to silver, then the gold coins are received at a higher rate than formerly.

This regulation produces the same effect as that, which I formerly recommended in the third book, would do, in fixing a standard for the unit of the money of Great Britain, according to the mean proportion of the metals: and it was for this reason, that [Book III. part I. chap. 1.] I asserted the bank money of Amsterdam to be an invariable unit, which the art of man had invented; that it stood like a rock in the sea, immoveable by the fluctuating proportion between the metals.

It is no objection against this, to allege the variation of the agio, and the fluctuation of the value of bank money according to demand. These variations ought to be referred to the coin, not to the bank money: the bank money is to be considered as fixed, because it has all the characters of invariability.

If, indeed, the affairs of the bank came to be ill administred, and that the credit written in the bank were allowed to swell so far beyond the demand for it, as to sink the value of bank money so far below the rate of coin as to make it impossible to recover itself; then I should allow that the bank money was no longer an invariable standard: but in this case, I should consider the bank as in a kind of political disease, because it would then be withdrawn from under the influence of its own principles, which hitherto has never been the case.

It has been imagined by many, that the treasure of the bank of Amsterdam has been, upon certain occasions, made use of for the public service. This is a conjecture merely; and perhaps it has been owing to the opinion which commonly prevails, that the treasure far exceeds all the uses which it can serve for. But as I am persuaded, 1_mo_, That this opinion is void of all foundation; 2_do_, That the treasure never can exceed the credits written; and, 3_tio_, That the credits never can exceed the uses those merchants have for them: so I am of opinion, that a value, in coin, to the full extent of those credits, actually exists in the repositories of the bank; because if I should suppose the contrary, it would imply a notorious infidelity in the bank administration: an infidelity, which, if ever it should be discovered, would overturn the whole credit of the bank, and, at one stroke, destroy the whole trade of that city. Now the use of three or four millions sterling, to the states of Holland, which they can procure when they will, at a very moderate interest, is not an object in the eyes of that sagacious government, sufficient to engage them to tamper with the bank treasure: and the rather, that were they driven to the necessity of having recourse to the bank, I make not the least doubt but that so great a company would be of more service to the state in writing off upon an occasion a temporary, untransferable credit at interest, which might afterwards be expunged, in order to procure coin within the country, than by delivering the coin corresponding to the credit of private merchants, which they must look upon as a most sacred deposit.

If we compare the credit of the bank of Amsterdam, with the credit of the bank of England, we shall find the first infinitely inferior to the latter as to extent, though not one bit inferior with respect to the solidity of it.

The extent of the credit of the bank of Amsterdam is limited to the sum of the credits written in their books, either in permanent transfer, as I shall call it, or in credit on cash deposited upon recipisse. All this credit put together, cannot extend beyond the limits of the circulation of the city of Amsterdam, in their domestic dealings, and in their exchange business; which last is indeed very great.

But the credit of the bank of England is equal (in a manner) to all the circulation and exchange business of London, and all the taxes paid in Great Britain. This bank, in circulating its paper, is not limited to the weight of coin in England. The whole interest of the national debt, and expence of the state, may be paid in the paper of the bank, and be perfectly well secured, although their treasure in coin may seldom amount to above four millions sterling.

We must however allow, that banks of circulation, when ill conducted, are liable to great abuse; as has been abundantly explained in treating of the Missisippi. But how is abuse to be prevented, while men conduct? And disasters may happen to a bank of deposit, to which the other is not so much exposed. May not the treasure of the bank of Amsterdam be lent out on bad security? May not the state lay hold of it? May not an earthquake swallow up the stadthouse? May not the sea break in, and demolish it? May not another invader, like the late King of France, in 1672, be more successful, and carry off the bank?

These are abuses and calamities to which the bank of Amsterdam is exposed; and from many of which the bank of England is in a great measure protected.

Besides the banks I have mentioned, not so much with a view to give an historical account of their operations, as to illustrate the principles on which they are established, there are many others in Europe of great and extensive credit; such as that of Hamburg, Venice, Genoa (until the state spent the treasure deposited) Nuremberg, &c. Every one of these participate more of the nature of that of Amsterdam, than of those in Great Britain. They are more calculated for preserving the standard of their bank money, against the adulterations of coin, and for providing a fund of cash, transferable in bank credit, than for the assistance of government, or the melting down of solid property, which are the great advantages peculiar to banks of circulation.

These last are also infinitely more lucrative to the bankers than those of deposit, from the interest they draw from credits given, discount of bills, and loans to government.

The profits on the bank of Amsterdam are very trifling. They are confined to the small emoluments of 2 stivers for every transfer; besides the interest they draw from the brokers on the place de Dam, for the coin and credit they furnish them with; and, in the last place, the ½, ¼, or ⅛ per cent. every six months, for the coin deposited, in order to be afterwards drawn out. But on the other hand, they are freed from the enormous expence of providing coin for the payment of foreign balances, and from the great detail of business which the circulation of paper implies.

END OF THE SECOND PART.

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PRINCIPLES OF POLITICAL OECONOMY.

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