Sir James Steuart (1767)
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 they be considered relatively to their policy, they may be divided into banks of circulation, and banks of deposit.
If they be considered relatively to the principles upon which their credit is built, they may be divided into banks upon private credit, banks upon mercantile credit, and banks upon public credit.
It is to this last division only I must attend, 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.
First, 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.
Secondly, 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.
Thirdly, 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 free 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.
First, 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; because it rests upon the stability of certain fundamental maxims of government. Mercantile credit is still more difficult to be established; because the security is the most precarious of any; it depends upon opinion and speculation, more than upon a determinate fund provided for repayment of either capital or interest.
Secondly, 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 a value in the hands of the debtor, sufficient to acquit 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.
The third difference is with regard to the ease of transfer.
All 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, for 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 or to bearer; in which cases alone, the creditor can effectually transfer without the consent of the debtor.
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, may give a shock to mercantile credit all over Europe: and nothing will hurt public credit, as long as the stipulated interest continues regularly to be paid, and as long as the funds appropriated for this 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.
Private credit is either real, personal, or mixed.
Real security, 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 creditor. 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, as far as they affect the banker, and the banking stock pledged for the security of the paper: and real, as far as they affect the real securities granted to the banker for the notes he lends, which afterwards enter into circulation.
The ruling principle 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 inconsiderable, 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 differed from public credit in this only, that the solid property producing the income, was really in the hands of the debtor; whereas the fund which produces the public revenue is not in the hands of the state. This subdivision we have omitted, as its basis, in both cases, rests solely upon the regular payment of the interest. Of this nature are the contracts of constitution in France, and the old investments of annual rent in Scotland. There are few nations, I believe, in Europe, where some traces, at least, of this kind of security do 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: this has been abundantly explained in the 27th chapter of the second book; and therefore I shall not here interrupt my subject with a needless repetition.
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 has been often observed, subjects of a complex nature 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 may be better discovered by an examination into the principles upon which we find banking established, than by any other method I can contrive. It has been by inquiring 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 domestic circulation. This induces me to think that the best way to communicate my thoughts on this subject, is to lay down the result of my inquiries relatively 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, these 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 others.
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, comes to rest upon one or other of them.
In countries where trade and industry are in their infancy, credit can be but little known; consequently, they who have solid property, must find great difficulty in turning it into money; without money, again, industry cannot be carried on, as we have abundantly explained in the 26th chapter of the second book; consequently without credit the whole plan of national improvement will be 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 this 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 these 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 the many operations of the Scotch banks, during the time 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 to England only, 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 is the case with 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 this 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 the three kinds of banks 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 entering 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(1*) solid property may be melted down. By the means of banks, money may be constantly kept at a due proportion to alienation. If alienation increase, more property may be melted down. If it diminish, the quantity of money stagnating, wil1 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. Banks must pay, as agents for the country, the balance of their trade with foreign nations. Banks keep the mints at work; and it is by their means, principally, that private, mercantile, and public credit are supported. I can point out the utility of banks in no way so striking, as to recal to mind the surprising 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 this man produced, in two years time, the most surprising 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.
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 these 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 varies even according to circumstances, as we shall afterwards observe.
The profits of the bank proceed from the interest paid upon all the money advanced by the bank, in consequence of credits given.(2*)
Out of these profits 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 prodding it; and thirdly, the expence of transacting and paying all balances due to other nations.
In proportion, therefore, as the interest upon the money advanced by the bank in consequence of the securities, exceeds the loss of interest on the coin in the bank, the expence of management, and of prodding 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 it regards the bank, it is their original property; and so far as it 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, or for articles of present consumption, or in a precarious trade.
When paper is issued by a bank for no value received, the security of such paper stands upon the original capital of the bank alone; 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, instead 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 will be secured on good private security; this security carries interest to him, in proportion to the money which has been advanced by 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 to pay in the metals. Coin may be wanting, upon some occasions, to men of the greatest landed property. Is this a 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 to 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 good 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 them in virtue of the notes which circulate through their hands.
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 of 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 notes of the one are as readily paid as those of 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 to such success. 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.
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 proves only, that banks are not, alone, sufficient for carrying on every branch of circulation. A truth which nobody will controvert. 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 this 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 this 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 the 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 1/2 per cent or more, according to circumstances, over and above the interest of their advance; these are 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: whereas were a like credit 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 break 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 make allowances for 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 should not have introduced it.
In all banks of circulation upon mortgage, the obligation in the note is to pay in coin, upon demand: and in the famous bank of Mr Law, there was a very necessary clause added to the note; 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 inconveniences which might result to either party, by the king's arbitrarily 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 some persons of the most acute understanding in many things, 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, in my opinion, coin is not absolutely necessary for carrying on domestic circulation, and more will be said on this 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, concerning 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 it. This loan is made in their own notes; which are quickly thrown into circulation by the borrower; who borrowed them, because he had occasion to pay them away. In like manner, when a credit is given, the bank pays (in her notes) all 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; or 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 written 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, in the discounting of bills, and in buying gold and silver 7,333,333 1/3 pounds, which, at 3 per cent interest or profit, will amount to the above 220,000 pounds, and remains 3,666,666 2/3 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 any other person's, except that of the bank itself; which, it would appear, has some interest in keeping such affairs a secret.
We see by his account, that the bank of England keeps in coin one third part 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 foreign balance, the notes which the bank had issued to support domestic circulation only, come upon it for the payment of this 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 from 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 inconveniences 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 principally 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.
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 this 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 this be mostly in bank paper, he must give the bank paper for a bill to the exchanger, whose business it is to place funds in those parts upon which bills are demanded. The exchanger again (to support the 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 nations 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 of money to other nations.
These three put together, make what 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 supplied by banks, while they have one note in circulation.
How then is this coin to be procured by nations who have no mines of their own?
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 this 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 to foreigners by the bank, 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 farther 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 finite 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 end 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 conducting 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.
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; or by a renewal of the former credit; 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 upon them, can remove the inconvenience; and if recourse be had to a new credit, instead of the loan, the same difficulty will recur, whenever this credit again 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 their 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 this, or to pay in coin.
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 this 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. This 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 this 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, and of its notes, in order to draw coin from the bank, which they export. This throws a great load upon the bank, which is constantly obliged to provide a sufficient quantity of coin 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 them in coin, or stop payment.
It cannot, therefore, be said, that exchangers do wrong; nor can they be blamed for 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 what is due, must constitute the rest of the world debtors to the country which sends out their coin. The consequence of this would be 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 this operation, for the same reason that they gain, by that of 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 sometimes send their money out of the country, at a time when it is already drained of its coin; because 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 to sacrifice a part of the interest due upon the obligations in their hands, which are secured upon the solid property of the country, and to appropriate this sum of interest for a fund to pay regularly the interest of the foreign loans, which will 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 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 a demand 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, for the sake 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?
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, of manufactures, of modes of living, and of the customary expence of the inhabitants, when taken altogether, 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 may go on without any payment at all, until accounts be cleared; and then nothing will be to be paid, except 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 will be 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 circulate 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-money 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, must be paid either in coin, or 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-money, 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 this question: all we need to say is, that it is the profit of banks to accustom people to the use of paper-money as much as possible; and therefore they will draw to themselves as much coin as they can.
When a favourable balance of trade brings the price of 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 else to make (A) regorge, so as to sink the interest of money below the bank lending price: in this case 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 the mass 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, caeteris paribus, so will money; that is, more solid property will be melted down; and when trade and alienation diminish, caeteris 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; the operation only is more awkward and expensive. When coin becomes scarce, it is hardly possible, in remote provinces, to find any credit at all; and in the centre of circulation, the use of it (interest) must rise very considerably, and must 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, which 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 coin from coming into the hands of those who would have occasion for it, did they but know where to come at it. Paper-money, 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.
Let us 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, must, in order to pay it, either exhaust a part of (B), by sending it away, or they must carry 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 notes which have been paid in coin by the bank 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 of notes, supposed to be issued by the bank, in order to fill up (C) to the level, really implies 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 these 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 into coin or foreign bills, the value of these additional securities granted for this new recruit of notes.
Is not this quite consistent with reason, fact, and common sense? If a country contract debts to foreigners, are not the consequences just the same as when one man contracts a debt to another in the same society? Must not the ultimate consequence of such debts be, that they 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 it, not sufficient; then land, or an annual and perpetual income out of must make up the deficiency; in which case 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. But in this case, banks never could neglect laying down a plan whereby to avoid a constant loss similar to what 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 bank 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 the demand again to come upon them (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 for a perpetual loan 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.(3*)
But banks in prosperous trading nations sit down with casual and temporary inconveniences; 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 a choice, and may refuse to grant 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 their manner of reasoning, 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, this 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 as 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 keep 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 for 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 domestic 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 of it.
Such management may be prudent when the circulating notes of a bank are very few, and when the balance is very great. In this 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 circulating notes to exceed the balance due, then all the hurt which can be done is done already; and the more notes that are issued, and the more credit that is given, must be so much the better for the bank; because the interest due upon all that are 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 sum of money necessary for carrying on 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 be able to command coin and credit equal to the sum of (B) and (D). If they have in credit the value of (D) in any foreign place, where a general circulation of exchange is carried on, then they have occasion only for (B) at home, and can furnish bills to the amount of (D).
But in furnishing bills to the amount of (D), those who receive the bills from the bank, must pay to the bank the value of these bills in bank notes; and the notes with which they pay for the bills, must be taken out of (A), which (A) we suppose to be necessary for carrying on domestic circulation. This diminution upon the value of (A), will occasion a new demand for notes in order to carry (A) to its former extent; and the bank at issuing the notes demanded, will receive new securities from those who demand them. Farther, the interest paid upon these new securities, will answer for the payment of the interest of the money owing to foreigners, in consequence of the bills drawn upon them to the order of those who bought the bills from the bank for the payment of (D).
This transaction concluded, the consequence will be: that (A) will be made up to the complete sum necessary for domestic circulation; and that the interest of the money borrowed from foreigners, in order to acquit the balance (D), will be paid out of the interest paid upon the new securities.
As soon as (D) is thus completely paid off, were coin drawn from the bank, and sent away by private people, (exchangers, etc.) it would, form a balance due to the country; which balance would render exchange favourable, and would occasion a loss to those who sent away the coin. During this period, the more credit the bank gives, so much more will its profits increase, and no demand can be made upon it for coin.
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 for 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; by raising 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.
In every question relative to this subject, we must return to principles. This is the only sure method of avoiding error. The more 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 paper money, and to 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 off 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, as far as is necessary for keeping up the fund of domestic 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 this means avoid abstract reasoning 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, first, to import considerable quantities of grain in some bad years; secondly, to refund the English loans of money settled there in former times; thirdly, to furnish some of the inhabitants with funds, which they thought fit to place in England; fourthly, 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, first, a great part of the industrious inhabitants who went to supply the fleets and armies; secondly, the absence of the ordinary contingent of troops; and thirdly, the cutting off of several beneficial articles of commerce. Let me suppose, I say, that from the total 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 have carried it, as I wish to do, rather beyond the truth.
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 borrowed every year 200,000 l. sterling, and alienated annually in favour of England, a fund for paying the interest of two hundred thousand pounds capital; the million of Scots currency would have been diminished in proportion to the deficiency: and would not the consequence of this be, caeteris paribus, to bring the currency below the demand for it; and, consequently, to hurt trade, industry, and alienation?
Now supposing the banks, instead of borrowing 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 of coin and bills to supply the demand of exchangers, whose business it is to send out this annual balance; what would 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 to be 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 banks (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 phaenomenon 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 of 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 the circulation of the industrious only, and of the rich; in short, it is 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 well 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 rendering 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 the first year's drain it will not be in great plenty, expedients must be fallen upon. In such a case, if the bank do 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, as government does, half yearly, 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 these operations will end (as to the bank) in paying 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 noise diminished; there will be no call extra-ordinary for coin, no rising of exchange; the bank will have this in its hands; and if it rise, it will be the bank, not the exchangers who will profit by it.
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 ill 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 ill obtain six months' credit at London, and in consequence of this, their bills will be honoured and paid. This credit, however, costs them money, which is added to the exchange: the bank, at the end of six months, must pay 200,000 l. sterling in coin, which in the interval it must provide from London. It must pay 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, etc. expence to the bank in providing coin, expence to the exchangers in returning it: after all, I say, the operation ends 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 this sum in England upon a permanent fund. Instead of which it compensates the interest taken out interest of a temporary loan, with the same sum of 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 will result to itself a loss equal to the interest of what it refuses to lend; that is to say, there will be a lucrum cessans to the bank of the interest of this 200,000 l. at 5 per cent or 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 credits already given, it will still more diminish circulation: but then by this operation it will diminish the mass of its securities, and so diminish the sum of the interest annually paid to itself. If it go farther and borrow money at home, such loans will be made in its own paper, which will diminish farther the mass of circulation; and if it go on recalling its credits and mortgages, it will soon draw every bit of its paper out of circulation, and remain creditor upon Scotland for the balance only 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 its own notes, or recalling the credits it had formerly given.
By the first step, namely, by refusing credit, it appears passive only in allowing natural causes to destroy both the bank and the nation, as I think has been proved.
By the second, namely, by borrowing its own notes, 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 centre 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 considering all circumstances, 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 smaller banks to pick up from them every shilling of coin which these smaller 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 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 to recall 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 for 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 while the principal exchangers reside at Edinburgh, they never can avoid the loss of paying the balance; consequently, 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 loss they sustain by furnishing coin to the other banks for the payment of the balance; and then compare this 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 smaller 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 this 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 this sum twice a year.
Now the value of a 4 per cent is at present about 96; so in paying 40 s. half yearly 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 let me suppose that they shall have recourse to exchangers to remit this interest, and that they shall 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.(4*) 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:
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, she would find as many difficulties in extricating herself by domestic borrowings, bank circulation, etc. 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 alleged, 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 vent, being far beyond the extent of it; and that, consequently, the paper came back upon the bank, produced a demand 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 of it 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 banks 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 may remain. But in favour of circulation, or in favour of what may be exacted by foreign creditors, banks never can misjudge it 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, were all her debts to strangers 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 by making payment of it whenever it is convenient.
I have said above, that after all my reasonings, 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 expedient for calling in the old, and for 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 this 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 be brought so low, as 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 shopkeepers 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 for 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 extravagant landlord receives, comes from the industrious farmer, for the price of his grain, etc. 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, prove, 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 inconveniences from an unexpected change of bank management; but as long as there is a demand for such commodities, there will be a supply of them; 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 alleged, that in the beginning of the year 1762, when the Edinburgh banks withdrew 1/4 of all their cash accompts, and opened a subscription for borrowing 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?
Had it therefore been 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 63 1/4: 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 74 1/2, 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 this fund. 100 l. produced in Scotland 5 l. interest, this 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 1/5 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 smallness of the sum advanced, upon which the profit was made, and the ministerial interest which was necessary to obtain a share in those subscriptions, rendered 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 with this 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.'
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 payment at a certain 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 incontroverted 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 an advantage to the bank, in prejudice of the holder of the paper (except as far as the holder is thereby deprived of the use of the 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 using it, and then compare the advantages with the inconveniences, in order to determine whether it be expedient to permit such obstructions in the circulation of paper.
The advantage 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 avail themselves of the optional clare. Could banks, therefore, borrow coin in a moment, at the same interest which they pay to the holder of the note, they would certainly never make use of this optional clause. But this coin can not be found in a moment; and the banks, to save themselves the trouble, and the expence of augmenting their fund of coin, or of procuring a fund in 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 in 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 contracts 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 this 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 the carrying on of 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.... This being the case, the shortest and the best method for preventing such abuses, is to oblige banks to pay upon demand, in coin or bills, at the option of the holders of the note. This will force them into the method for providing them; to wit, fairly to borrow money from nations to whom we owe, and to pay 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.
I have examined, with all the care I am capable of, the nature of banks calculating for the melting down of solid property, and the converting of 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; therefore 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 chiefly 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 to be considered only 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 of 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, or from an exchanger, 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 6o days they will not discount it. So in this case the merchant must keep his bill until it is within 6o 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 hills, is plainly to employ the cash of 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 do 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 does it happen, 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 gathered 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 to 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 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 this 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 Scotland, we have seen how directly contrary to all principles it is, for its banks to borrow money within the sphere of their own circulation. How this diminishes the profits upon their own trade, and hurts the circulation of the country; but although it diminish their profit, it carries along with it no positive loss to them, as would be the case, were a London banker to 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, which would be the case, were the notes of hand drawn for obtaining credit, instead 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 this 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 its 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 the 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 these funds for which government allows to the bank a sum proportionate to the expence of this 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 this 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 companies 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 break 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 it: 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 as 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 during a wrong balance upon the trade of England, leaves circulation provided with a light currency only, 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, as 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.
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; 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'état, 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 million 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.
The bank accordingly was established in favour of Law and Company, by letters patent, of the 2nd 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.
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 rendering 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 nobody seemed dissatisfied: the nation was rather pleased: so familiar were the variations of the coin in those days that nobody ever considered anything 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 the credit of those of Mr Law's had been; 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.(5*)
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.(6*)
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 ruin, 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 bursted, than the whole nation was thrown into astonishment and consternation. Nobody 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 written 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 written, 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 Missisippi 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.
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 this 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 of it; 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 rendered 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. 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 must always be good, provided 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.
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, provided 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 to be made in time to come. 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 aera and beginning of all the confusion. From this loan proceeded the downfal of the whole system.
These things premised, what follows will, I hope, be easily understood.
As soon as the Regent of France perceived the wonderful effects produced by 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 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'état, 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 the company 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 it was stipulated that 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 200,000 actions had produced no liquid value which could be turned into trade (having been paid for in state billets), a 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,June 10, 1719, 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'état 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 scheme which I am now to unfold, must have more or less, taken place between the Regent and this great company.
The public was abundantly persuaded of the prodigious profits of the company, before they got possession of the general farms. No sooner had they got this 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 to have been 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 this new dividend.
But what could be the motive of the company to promise this dividend, three months only 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 people to enter into an examination of the wonderful phaenomena 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 keep up a greater quantity of notes in circulation.
This was to be accomplished, first by the Regent's purchasing the actions himself from the company; secondly, by borrowing back the notes he had paid for them, in order to fill up the loan which the company had agreed to make; thirdly, to pay off all the public creditors with those notes so borrowed back; and fourthly, when the nation was once filled with bank paper, to sell at an adequate price, the actions he had purchased from the company, to withdraw his own paper, and then to 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.
Now if we examine the motives of the Regent, with regard to this plan, and suppose that he forsaw 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 everyone; 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 barefaced and might have endangered the credit of the bank. Whereas in buying the actions, which were sought after by everybody, the state appeared desirous only 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 manoeuvre 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 speaking (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 no more than 400,000 actions created, rated at 777 millions: of these were already 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 preceeding table, we perceive, that after the actions were once carried to their full number (October 4th 1719), the coining of bank notes went on at a most prodigious rate: so much that by the month of May 1720, they were increased from 520 millions, to above 2696 millions; and on the 21st of that month, 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 in consequence of this 25 millions of interest upon the sum of money due by the King to the company, were 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 acknowledged publicly, that the notes were coined for this purpose. (See Dutot, Vol. I, p. 144.) In the next place, it is evident, that the notes which had been given by the state in payment for these actions, must have been paid back to the state, by the company, in order 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, on the 21st of May 1720; and we shall see how they were paid and withdrawn in October following.
This detail is, I confess, 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 this 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 2nd and 4th of October, to their full number, the company, during this 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 expenses of the state, and all unnecessary charge was avoided in collecting and administering 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. Since this 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 merely the consequence of a political contrivance.
But if money, at that time, came to bear no more than 2 per cent and if the company were able to afford 200 livres upon the action; where was the iniquity 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 Missisippi: 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 justify the Regent from the gross imputation of fraud, in the conduct of the Missisippi.
But what should still more exculpate this 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 in favour of 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, provided there was coin enough in France for the changing of it; and this, although the coin itself 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 date 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 to suppose the contrary, would be to allow them an finite superiority of understanding over all the rest of Europe.
Until the bubble bursted nobody could know where it was to end: everything appeared very extraordinary indeed; and the fatal catastrophe might have been expected from the greatness of the undertaking, merely. But had there 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 this 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 forbidden to have 500 livres in coin in any person's custody; consequently, it was also forbidden 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; without any 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 this opinion I never can subscribe.
It may seem surprising that I should take so much pains to justify the two principal conductors of this 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.
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 22nd 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 comptroller-general for the time being, was to have, at all times, together 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 nobody minded gold or silver any more than if the denomination in their paper had had no relation to these 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, rising 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 33 1/3 per Cent. upon this operation. Did this hurt the credit of the bank paper? Not in the least.
As 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 in coin 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 28th 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 2 2/27 are to 1; that is to say, that 207 livres 8 sols 1 7/8 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 calculation of Dutot's, 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 under deliberation, before the famous arret of the 21st of May was given, viz. whether it were better 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 this 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 rational to reject both the alternatives, and 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 resolved to reduce to one half, 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 the prices of commodities were supposed to be 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 22nd 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 fetched 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'équité,' (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 written 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 county, 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 written a book, which indeed few people can understand, in order to prove the great hurt of tampering with the coin of France?
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.
This 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 2 1/2 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 farewell to credit and confidence; and to return to the old system of rents upon the town-house of Paris; and of coming at money in the best way they could.
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 facts so much 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.
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 preceding 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 very day following?
If there had been a value, said they, what became of it? If there never was any value, how could a nation be so deceived? This phaenomenon 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 rendered precarious, by a blundering administration: then credit filed, 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, rised so high by the low rate of interest, might have been preferred: consequently this 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 phaenomenon above mentioned and then shew how, in the greatest of all the French distress, their credit might have been reestablished in a more solid manner than ever.
As to the wonderful phaenomenon 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.
First, 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.
Secondly, These debts were mostly 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.
Thirdly, 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, the 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, administered 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, 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 had been used 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.
Fourthly, 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 phaenomenon.
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. Nobody 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 11 1/2 per cent only.
Now the rate of this subscription was at 2 1/2 per cent as we have seen; consequently, if 100 livres of notes lost but 11 1/2 per cent they were worth 88 1/2 livres in coin; but these 100 livres in notes were worth 2 1/2 per cent because the subscription was open at that rate: consequently 88 1/2 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 should, 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 should have set before the public a full and exact account of the company's funds. I should have banished all mystery from the affairs of credit. I should have registered a declaration in parliament, setting forth,
First, That all future changes either upon the denominations of paper or coin, were contrary to the maims of good government.
Secondly, That all stipulations between the King and his creditors, were to be inviolable. And,
Thirdly, That the parliament of Paris should for ever remain invested with an exclusive right to watch over these regulations in time to come; and I should have bound the parliament by a special oath for this purpose. I should 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, first, 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: secondly, That money would have come back to 2 per cent and then, thirdly, Had banks been established upon a proper plan, ease, with industry, would long ere now have appeared in every corner of that kingdom.
How finitely 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 and accepted. 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 its proper place.
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 various 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.
First, 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.
Secondly, 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 given for the value.
If at any time a bank of deposit should lend, or should in anywise dispose of any part of this fund, which may consist in coin, bullion, or any other precious moveable, once delivered to them, to the end that a credit in money may be written down for it in their books of transfer, in favour of the depositor, and his assigns; by this act, the bank departs from the principles upon which it is established. And if any bank be established which, by its regulations, may so dispose of the fund of its 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.
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 Essai 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 written 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 this to be shut up in the bank, and were the credits written in the books of the bank to exceed this 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 in transfer only. 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.
1. 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 the meaning of our terms, in proportion to the circumstances concerning which we reason.
2. Let it be remarked in this place, that although all persons obtaining credit from a bank for a determinate sum, be obliged to grant a proper security for the whole sum; yet by the nature of the obligation, no interest becomes due to the bank in consequence of it, except in proportion to the sums advanced, and to the time of such advance by the bank. Example: A. Obtains a credit from a bank for one thousand pounds. After one month he mikes a call for one hundred pounds; the interest of this hundred pounds commences from the day only on which the bank pays it; and were A. to replace this sum to the bank one week after, he will be liable for one week's interest only, of one hundred pounds notwithstanding that his obligation lies in the hand of the bank for one thousand pounds. When, therefore, in the course of this subject, we shall mike mention of the interest due to the bank upon the securities in their hand, for the credits they have given; this is always understood to be restricted to the sums actually advanced by the bank upon such credits.
3. 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.
4. 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 remembered, that all those contracts 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.
5. 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.
6. 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 free himself, and to make over to his subjects, for more than fifty-two millions of taxes, which had been imposed in the years preceding 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 ancient 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: everything was commendable, and worthy of admiration.' These are the sentiments of Dutot concerning this system of paper credit.