work, a statesman must lend his hand. He must give a validity to
mercantile obligations, which have no name in his law books: he must
support the weak against the strong: he must reform the unwieldy
procedure of courts of justice: he must facilitate the sale of property:
he must establish the credibility of merchants books regularly kept: he
must discourage frauds, and support fair dealing.
When such a plan is once established, confidence will find a basis in
the property of every individual who profits by it. When it is not
established, credit will appear like a meteor: intelligent and crafty
men will avail themselves of it, and thereby dazzle the eyes of the
public, with gilded schemes of opulence and prosperity: mankind will fly
to industry, confidence will be established; but as there will be no
method of determining the bounds of that confidence, the promoters of
the scheme will profit of the delusion: confidence will vanish; and the
whole will appear to have been a mystery, a dream. Is not this a
representation of many projects set on foot since the beginning of this
century? What were the South Sea’s and Missisippi’s, but an abuse of
confidence? Had ever the _cause_ of confidence been examined into, would
ever such extravagant ideas have arrived at the height they did?
Credit therefore must have a _real_, not an _imaginary_ object to
support it; and although I allow that in all operations of _mercantile_
credit, there must be something left to chance and accident; yet that
chance must bear a due proportion to the extraordinary profits
reasonably to be expected from the undertaking.
From this it appears, what an useful speculation it is to inquire
properly into the nature of credit; to deduce with accuracy the
principles upon which it is founded; to banish mystery from plain
reason; to shew how even the most surprizing effect of credit, whether
tending to the advantage, or to the hurt of society, may easily be
accounted for; and, which is the most useful of all, to point out how
such effects may be foreseen, so as either to be improved or prevented.
In going through so extensive a subject, as a deduction of the
principles of credit, method is very necessary; and when a detail is
long, subdivisions are very convenient. I have, upon this account,
divided this book into four parts.
The first shall be set apart for deducing the principles which regulate
the rate of interest; because this is the basis of the whole.
The second, for the principles of banking; under which I shall have an
opportunity to unfold the whole doctrine of domestic circulation.
The third, for those of exchange; which is equally well calculated for
carrying on foreign circulation; and as to what regards debts, and the
borrowing of money, with all the consequences which they draw along with
them, these important objects will furnish ample matter for
The fourth and last part, which shall treat of the principles of public
credit.
These premised, I proceed to the definition of credit.
CHAP. I.
_What Credit is, and on what founded._
Credit is the _reasonable expectation entertained by him who fulfills
his side of any contract, that the other contracting party will
reciprocally make good his engagements_.
To illustrate this, we may say with the lawyers, that as all contracts
may be reduced under one of the following heads, _Do ut des, do ut
facias; facio ut des, facio ut facias_; so he who actually gives or
performs his part, is the creditor, or the person who gives credit; and
he who only promises to give or perform, is the debtor, or the person
who receives it.
Credit, therefore, is no more than a _well established_ confidence
between men, in what relates to the fulfilling their engagements. This
confidence must be supported by laws, and established by manners. By
laws, the execution of formal contracts may be enforced: manners, alone,
can introduce that entire confidence which is requisite to form the
spirit of a trading nation.
Credit, in its infancy, must be supported by statutes, and enforced by
penalties; but when it is once well established, every recourse had to
law, is found to wound the delicacy of its constitution. For this reason
we see, that in certain nations, the legislator wisely excludes the
ordinary courts of justice from extending their rigid jurisdiction over
mercantile engagements: they leave to the prudence and good faith of men
versed in commerce, to extricate the combinations which result from such
transactions; because they are to be interpreted more according to the
constant fluctuation of manners, than to the more permanent institutions
of positive law.
The more the jurisdiction of the statesman is unlimited; or in other
words, the less the power of any sovereign is restrained, by the laws
and constitution of the state he governs, the more it behoves him to
avoid every step of administration which can make his authority be felt
in cases where credit is concerned. If he should happen, for example, to
be a debtor himself, he must take good care never to appear in any other
light to his creditor. The moment he puts on the sovereign, the same
moment all confidence is lost. For these reasons, we have hitherto had
few examples (I might perhaps have said none at all) where credit has
been found _permanently_ solid, under a pure monarchy.
But we must observe, at the same time, that the stability of credit is
not incompatible with that form of government. At certain times, we have
seen credit make a surprising progress in France; and it has never
suffered any check in that state, but from acts of power, which I think
have proceeded more from inadvertency, and want of knowledge, than from
a design of defrauding creditors. These may be looked on as blunders in
administration; because they have constantly disappointed the purpose
for which they were intended. Let me prove this by some examples.
The arret of 21 May 1720, (of which we shall give an account hereafter)
destroyed in one day the whole fabric of credit, which had been erected
in France during the course of three years; and which in so short a time
had mounted to a height hardly credible. I say, that in one day this
inadvertent step (for no real injury was intended) destroyed the credit
of 2,697,048,000 livres of bank notes, (above 120 millions sterling) and
of 624,000 actions of the East India company, which (reckoned at 5000
livres apiece, the price at which the company had last sold them) amount
to 3,120,000,000 livres, or above 140 millions sterling. Thus at one
blow, and in one day, 260 millions sterling of paper currency, payable
to bearers, was struck out of the circulation of France; by an useless
and inadvertent act of power, which ruined the nation, and withered the
hand which struck it: an event too little understood, and too little
remembered in that kingdom.
This plainly appears from their late conduct; for in the end of 1759, at
a time when the credit of France was in so flourishing a situation as to
have enabled her to borrow, that very year, near 200 millions of livres;
and when there was a prospect of being able to borrow, in the year
following, a far greater sum, the shutting up what they called their
_caisse d’amortissement_, for the sake of withholding 32 millions of
livres interest due to the creditors, struck all credit _with
foreigners_ dead in one instant.
These examples shew what fatal consequences follow a misjudged exercise
of power in matters of credit.
On the other hand, the rapid progress of credit in France before the
Missisippi, and the stability of it from 1726 to the year 1759,
abundantly proves, that nothing is more compatible than monarchy and
confidence. All that is wanting is the establishment of _one maxim in
government_; to wit, that the King’s power is never to extend so far, as
to alter the smallest article of such stipulations as have been made
with those who have lent money for the service of the state.
_Maxims in government bind the monarch and the legislature, as laws bind
subjects and subordinate magistrates_: the one and the other ought to be
held inviolable, so far as they regard credit; or confidence will be
precarious.
What has supported the credit of Great Britain, but the maxim constantly
adhered to, that the public faith pledged to her creditors is to be
inviolable?
Does any one doubt, but the legislature of that nation may spunge out
the public debts, with as much ease as a King of France? But in the one
kingdom, the whole nation must be consulted as to the propriety of such
a step; in the other, it may be done at the instigation of a single
person, ignorant of the consequences: but I hope to make it appear,
before the conclusion of this book, that it is impossible to form a
supposition, when a state can be benefited by deliberately departing,
for one moment, from the faith of her engagements. A national bankruptcy
may (no doubt) happen, and become irreparable; but that must be when the
state is emerging from a signal calamity, after having been involved in
ruin and confusion.
Confidence, then, is the soul and essence of credit, and in every
modification of it, we shall constantly find it built on that basis; but
this confidence must have for its object a _willingness_ and a
_capacity_ in the debtor to fulfil his obligations.
------------------------------------------------------------------------
CHAP. II.
_Of the Nature of Obligations to be performed, in Consequence of Credit
given._
We have already said, that all obligations contracted with a view to be
performed in future time, consist in doing or giving something; in
consideration of something _done_, or _given_.
When actions only are stipulated in contracts, _credit_ (in a strict
acceptation of the term) is little concerned; because no adequate
security can be given for performing an action: such contracts stand
wholly upon the willingness and capacity of _acting_, which depend more
upon the _person_ than upon the _faculties_ of the debtor. To supply
that defect, we see penalties usually stipulated in such cases; which
reduce those contracts to an alternative obligation of either _doing_ or
_giving_.
We shall therefore throw out the consideration of the first altogether,
as being foreign to our purpose; and adhere to the latter, which is the
true object of credit. Again,
In all obligations to give any particular thing, there is constantly
implied an alternative also; to wit, either the thing stipulated, or the
value (_id quod interest_, according to the lawyers) this must be
relative to money; which is the common price of all things in commerce
among men.
Thus we have brought credit to the object under which we are to consider
it, viz. the obligation to pay money, either for value received, or for
some consideration relative to the parties, which may be the just ground
of a contract.
Credit and debts are therefore inseparable, and very properly come to be
examined together in this book.
When money is to be paid at a distant period of time, the obligation may
either be, 1. for one precise sum; or 2. for that sum with interest,
during the interval between contracting and fulfilling the obligation.
The lending of money without interest, was very common, before the
introduction of trade and industry. Money then was considered as a
barren stock, incapable of producing fruit; and whenever the quantity of
it, in any country, exceeded the uses of circulation, the remainder was
locked up in treasures. In that light, the exacting of interest for it
appeared unreasonable.
Things are now changed: no money is ever locked up; and the regular
payment of interest for it, when borrowed, is as essential to the
obtaining of credit, as the confidence of being repaid the capital.
These periodical payments are a constant corroboration of this
confidence; so that it may be said, with truth, that he who can give
good security, to pay to perpetuity, a regular interest for money, will
obtain credit for any sum, although it should appear evident, that he
never can be in a capacity to refund the capital.
The reason of this may be gathered from the principles already deduced,
and from the plan of our modern oeconomy.
We have said in the second book, that the current money of a country is
always in proportion to the trade, industry, consumption, and
alienation, which regularly takes place in it; and when it happens that
the money already in the country is not sufficient for carrying on these
purposes, a part of the solid property, equal to the deficiency, may be
melted down (as we have called it) and made to circulate in paper. That
so soon again as this paper augments beyond that proportion, a part of
what was before in circulation, must return upon the debtor in the
paper, and be realized anew.
Now let us consider what is understood by _realized_. By this term is
meant, that the regorging paper, or that quantity of currency which a
nation possesses over and above what is necessary for its circulation,
must be turned into some shape whereby it may produce an income; for it
is now a maxim, that no money is to be suffered to remain useless to the
proprietor of it.
When this _regorging_ paper then comes upon the debtor in it, if he
should pay the value of it in hard specie, how would the condition of
the creditor be improved?
We suppose the credit of the paper equal to the credit of the coin
within the country. We also suppose that the paper has so stagnated in
the hands of the bearer, that he can neither lend it, or purchase with
it any species of solid property, within the country, capable to produce
an income: for if any way of disposing it usefully can be found, this
circumstance proves that circulation is not, at that time, fully
stocked; consequently, the money does not regorge. But let us suppose
that it does regorge; then he must either oblige the debtor in the paper
to pay in coin, and lock that up in his coffers, as was the case of old;
or he must send his coin to other countries, where circulation is not
fully stocked, and where an income may be bought with it. This
constantly happens when circulation is either overstocked, or when the
quantity of it begins to diminish in a country.
Let me next suppose, that in a country reasonably stocked with money, a
sudden demand for it, far beyond the ordinary rate of circulation,
should occur: suppose a war to break out, which absorbs, in a short
time, more money than, perhaps, all the coin in a nation can realize.
The state imposes a tax, which, let me suppose, may produce a sum equal
to the interest of the money required. Is it not very certain, that such
persons who found a difficulty in placing their regorging capitals, will
be better pleased to purchase a part of this annual interest, than to
lend it to any person who might pay it back in a short time; by which
repayment the lender would again be thrown into the same inconvenience
as before, of finding a proper out-let for it? This is a way of
realizing superfluous money, more effectual than turning it into gold or
silver.
When I speak, therefore, of realizing paper money, I understand either
the converting it into gold and silver, which is the money of the world;
or the placing of it in such a way as to produce a perpetual fund of
annual interest.
Were public borrowing, therefore, to work the effect of bringing the
money in circulation below the proportion required for carrying on
alienation, then an obligation to repay the capital would be necessary,
and complaints would be heard against the state for not paying off their
debts; because thereby the progress of industry would be prevented. But
when the operations of credit are allowed to introduce a method of
creating money anew, in proportion to the demand of industry, then the
state has no occasion to pay back capitals; and the public creditors
enjoy far better conditions in their annual income, than if the capitals
were refunded.
Let me illustrate this by an example.
We must take it for granted, that in every nation in Europe, there is a
sum in circulation equal to the alienation which goes on actually at the
time. We must also take it for granted, that the amount of all debts
whatsoever, public and private, paying interest to the class of
creditors, is a very great sum: now let us suppose, that the class of
debtors should be enabled (no matter by what means) to pay off what they
owe, in coin; would not, by the supposition, a sum nearly equal to that
coin immediately fall into stagnation, and would it not be impossible to
draw any income from it? This was exactly the case of old. The coin far
exceeded the uses of circulation, and stagnated in treasures. Wars
brought it out; because then circulation augmented; peace again cutting
off these extraordinary demands, the coin stagnated again, and returned
to the treasures.
What is the case at present?
Money and coin are never found to surpass the uses of circulation in
commercial countries. When war comes, which demands an extraordinary
supply, recourse is had to borrowing upon interest; not to treasures:
and the desire of purchasing this interest, which we call an annuity,
draws treasures even from the enemies of those nations who have the best
credit. Again, at the end of a war, in place of an empty treasure, as
was the case of old, we find a huge sum of public debts. As oeconomy
filled the treasury then, so oeconomy must pay off the debts now.
From what has been said, it plainly appears, that interest is now become
so absolutely essential to credit, that it may be considered as the
principal requisite, and basis on which the whole fabric stands: we
shall therefore begin by examining the origin and nature of interest,
and also the principles which influence the rate, and regulate the
fluctuations of it.
------------------------------------------------------------------------
CHAP. III.
_Of the Interest of Money._
I shall leave it to divines and casuists to determine how far the
exacting of interest for money is lawful, according to the principles of
our religion.
The Jews, by the laws of Moses, were forbid to lend at interest to their
brethren, but it was permitted to lend to strangers. _Deut._ chap.
xxiii. ver. 19, 20. This was one of the wisest political institutions to
be met with in so remote antiquity, as we shall hereafter explain.
In the primitive ages of christianity, the lending at interest was
certainly reputed to be unlawful on most occasions. That spirit of
charity, _to all who were in want_, was so warped in with the doctrine
of our religion, that a borrower was constantly considered to be in that
situation. Trade was little known; trading men were generally ill looked
upon; and those who deviated so far from the spirit of the times, as to
think of accumulating wealth by the use of their money, commonly
degenerated into usurers.
In the middle centuries, when a mistaken zeal animated christianity with
a most ungodly thirst for the blood of infidels, the Jews were, in every
nation in Europe, almost the only money lenders. This circumstance still
more engaged the church to dart her thunder against this practice; and
the loan upon interest never took root among christians, until a spirit
of trade and industry sprung up in Italy in the time of the Lombards,
and spread itself through the channel of the Hans-towns over several
nations.
Then the church began to open her eyes, and saw the expediency of
introducing many modifications, to limit the general anathema against
the whole class of money lenders. At one time it was declared lawful to
lend at interest, when the capital shared any risque in the hands of the
borrower; at another, it was found allowable; when the capital was not
demandable from the debtor, while he paid the interest: again, it was
permitted, when the debtor was declared by sentence of a judge, to be
_in mora_ in acquitting his obligation: at last, it was permitted on
bills of exchange. In short, in most Roman catholic countries, interest
is now permitted in every case almost, except in obligations bearing a
stipulation of interest for sums demandable at any time after the term
of payment; and it is as yet no where considered as essential to loan,
or demandable upon obligations payable on demand.
Expediency and the good of society (politically speaking) are the only
rule for judging, when the loan upon interest should be permitted, when
forbid. While people borrowed only in order to procure a circulating
equivalent for providing their necessaries, until they could have time
to dispose of their effects; and while there was seldom any certain
profit to be made by the use of the money borrowed, by turning it into
trade, it was very natural to consider the lender in an unfavourable
light; because it was supposed that the money, if not lent, must have
remained locked up in his coffers. But at present, when we see so many
people employed in providing stores of necessaries for others, which,
without money, could not be done; forbidding the loan upon interest, has
the effect of locking up the very instrument (money) which is necessary
for supplying the wants of the society. The loan, therefore, upon
interest, _as society now stands composed_, is established, not in
favour of the lenders, but of the whole community; and taking the matter
in this light, no one, I suppose, will pretend that what is beneficial
to a whole society should be forbid, because of its being proportionably
advantageous to some particular members of it.
If it be then allowed, that the loan upon interest is a good political
institution, relative to the present situation of European societies,
the next question is, to determine a proper standard for it, so as to
avoid the oppression of usurers, on one hand, and on the other, to allow
such a reasonable profit to the lender, as may engage him to throw his
money into circulation for the common advantage.
This question leads us directly to the examination of the principles
which regulate the rate of interest; and if we can discover a certain
rule, arising from the nature of things, and from the principles of
commerce, which may direct a statesman how to establish a proper
regulation in that matter, we may decide with certainty concerning the
exact limits, between unlawful and pinching usury, exacted by a vicious
set of men, who profit of the distress of individuals; and that
reasonable equivalent which men have a right to expect for the use of
their money, lent for carrying on the circulation of trade, and the
employment of the lower classes of a people, who must subsist by their
industry or labour.
------------------------------------------------------------------------
CHAP. IV.
_Of the_ Principles _which regulate the Rate of Interest_.
We must now recal to mind the principles of demand and competition, so
fully deduced in the second book, in order to answer the following
question, viz.
What is the principle which regulates, at all times, the just and
adequate rate of interest for money, in any particular state?
I answer, That at all times, there is in every state a certain number of
persons who have occasion to borrow money, and a certain number of
persons who desire to lend: there is also a certain sum of money
demanded by the borrowers, and a certain sum offered to be lent. The
borrowers desire to fix the interest as _low_ as they can; the lenders
seek, from a like principle of self-interest, to carry the rate of it as
high as _they_ can.
From this combination of interests arises a double competition, which
fluctuates between the two parties. If more is demanded to be borrowed,
than there is found to be lent, the competition will take place among
the borrowers. Such among them who have the most pressing occasion for
money, will offer the highest interest, and will be preferred. If, on
the contrary, the money to be lent exceeds the demand of the borrowers,
the competition will be upon the other side. Such of the lenders, who
have the most pressing occasion to draw an interest for their money,
will offer it at the lowest interest, and this offer will be accepted
of.
I need not launch out into a repetition of what has been said concerning
the influence of double competition, in fixing the price of commodities:
I suppose those principles understood, and well retained, by those who
read this chapter; and confine myself here to what is peculiar to the
demand for money.
The price of commodities is extremely fluctuating: they are all
calculated for particular uses; money serves every purpose. Commodities,
though of the same kind, differ in goodness: money _is_ all, or _ought
to be_ all of the same value, relative to its denominations. Hence the
_price of money_ (which is what we express by the term _interest_) is
susceptible of a far greater stability and uniformity, than the price of
any other thing.
We have shewn in the 28th chapter of the second book, in examining the
principles which regulate the prices of subsistence, that the only thing
which can fix a standard there, is frequent and familiar alienation. The
same holds true of money. Were we to suppose a state, where borrowing
and lending are not common, and where the laws fix no determinate
interest for money, it would hardly be possible to ascertain the rate of
it at any time. This was the case of old.
Before the reign of Henry VIII. of England, _anno_ 1545, there was no
statute regulating the rate of interest in that kingdom. The reason is
very plain. In those days there was little circulation, and the
borrowing upon interest was considered as a mortal sin. The consequence
of this was, that usurers, having nothing but conscience to restrain
them, carried the price of their money to a level with the pressing
occasion of spendthrifts, while others, from friendship, lent for no
interest at all. Henry fixed the rate of interest at 10 _per cent._ and
his cotemporary, Francis I. of France, _anno_ 1522, (who was the first
who borrowed money in a regular manner upon the town-house of Paris)
fixed the interest at the 12th penny, that is, at 8⅓ _per cent._
In those days, it was impossible for a statesman to determine any just
rate for interest; and accordingly we find history filled with the
extortion of usurers, on one hand, and the violence and injustice of
Princes and ministers towards those who had lent them money, on the
other: was it then any wonder, that lending at interest was universally
cried out against? It really produced very little good, and was the
cause of manifold calamities to a state. When the Prince borrowed, it
was when in the most urgent distress: those who lent to him, foresaw the
danger of being plundered if they refused, and of being defrauded as
soon as the public distress was over: for this reason they exacted the
most exorbitant interest: the consequence was, that the people were
loaded with the most grievous taxes, and the tax-gatherers were the
Prince’s creditors, to whom such taxes were assigned.
In our days, trade, industry, and a call for money for such purposes,
enable the borrower to enrich himself, to supply the wants of the state,
and to pay his interest regularly.
If we compare the two situations, we shall find every disadvantage
attending the former, and every advantage connected with the latter.
Without good faith there is no credit; without credit there is no
borrowing of money, no trade, no industry, no circulation, no bread for
the lower classes, no luxury, not even the conveniencies of life, for
the rich. Under these circumstances, there can be no rule for the rate
of interest; because borrowing cannot be frequent and familiar.
In proportion, therefore, as borrowing becomes frequent and familiar,
the rule for fixing the rate of a legal interest becomes more
practicable to a statesman. Let me take a step farther.
We have said, that it is the fluctuation of the double competition
between borrowers and lenders, which occasions the rise and fall of the
rate of interest; I must now point out the principles which occasion
this fluctuation.
Were the interests of trade and industry so exactly established, as to
produce the same profit on every branch, the money borrowed for carrying
them on, would naturally be taken at the same rate; but this is not the
case: some branches afford more, some less profit. In proportion,
therefore, to the advantages to be reaped from borrowed money, the
borrowers offer more or less for the use of it.
Besides the class of men who borrow _in order to profit_ by the loan,
there is another class, who borrow _in order to dissipate_. The first
class never can offer an interest which exceeds the proportion of their
gains: the second class, finding nothing but want of credit to limit
their expence, become a prey to usurers. Were it not then upon account
of these last, there would be no occasion for a statute to regulate the
rate of interest. The profits on trade would strike an average among the
industrious classes; and that average would fall and rise, in proportion
to the flourishing or decay of commerce.
Let us next examine the principles which prevent the monied men from
committing extortions, and which oblige them to lend their money for
that rate of interest which is in proportion to the profits upon trade
and industry.
In every country there is found a sum of money (that is, of circulating
value, no matter whether coin or paper) proportioned to the trade and
industry of it. How this sum is determined, and how it is made to
augment and diminish in proportion to industry, we have already
explained in the 26th chapter of the second book: we are now to examine
some of the consequences which result from the accidental stagnation of
any part of it to the prejudice of alienation; and we must shew how the
loan upon interest is the means of throwing it again into circulation.
There are in every state some who spend more, and some who spend less
than their income. What is not spent must stagnate; or be lent to those
who spend more than the produce of their own funds. Were the first class
found so to preponderate, as to require more money to borrow than all
that is to be lent, the consequence would be, to prevent the borrowing
of merchants; to raise interest so high as to extinguish trade; and to
destroy industry; and these resources coming to fail, foreign
commodities would be brought in, while exportation would be stopt, money
would disappear, and all would fall into decay.
This, I believe, is a case which seldom happens; because the rise of
interest (as states are now formed) has so much the effect of
depreciating the value of every species of solid property, that
spendthrifts are quickly stripped of them, by the growing accumulation
of that canker worm, interest; their ruin terrifies many from following
so hurtful an example, and their property falling into the hands of the
other class, who spend less than their income; these new possessors
introduce, by their example, a more frugal set of manners. This may be
the case in countries where trade and industry have been introduced; and
where the operations of credit have been able to draw a large quantity
of solid property into circulation, according to the principles deduced
in the chapter above referred to. But in nations of idleness, who
circulate their coin only, and who are deprived of the resource of
credit, high interest prevents them from emerging out of their sloth;
the little trade they have, continues to produce great profits, which
are incompatible with foreign commerce: this may, indeed, make the coin
they have circulate for home consumption, but can bring nothing from
abroad.
On the other hand, when trade and industry flourish, and a monied
interest is formed, in consequence of melting down of solid property,
and still more when a state comes to contract great debts, were the
money lenders to attempt to raise the rate of interest to the standard
of the spendthrift, the demands of trade, &c. would soon be cut off: the
stagnation would then swell so fast in their hands, that it would in a
manner choak them, and in a little time interest would fall to nothing.
Whereas by contenting themselves with the standard of trade, the largest
supplies (provided for the borrowers) easily find a vent, without
raising the rate of interest so high as to be hurtful to any interest
within the state.
Add to this, that the advantage of realizing, into lands, so unstable a
property as money, must naturally throw the proprietors of it into a
competition for the lands which dissipation brings to market; and so by
raising the value of these, they, with their own hands, defeat the
consequences of the dissipation of spendthrifts, and hurt their own
interest, to wit, the rise of the price of money. From a combination of
these circumstances, lenders become obliged to part with their money at
that rate of interest which is the most consistent with the good of
commerce.
We have hitherto preserved our combinations as simple as possible. We
have suggested no extrinsic obstacle to borrowing and lending. If money
is to be lent, and if people are found who incline to borrow, we have
taken it for granted, that circulation will go on; and that the
stagnations in the hands of the lenders, will find a ready vent by the
dissipation of the other class: we must now take a step farther.
The spendthrifts must have credit; that is, they must have it in their
power to repay with interest what they have borrowed: any impediment to
credit, has the effect either of diminishing the demand for money, and
consequently of lowering the rate of interest, or of introducing
unlawful usury. If we suppose the rate of interest well determined, and
usury prevented by a regular execution of good laws, it is very certain,
that a statesman by hurting the credit of extravagant people, will keep
the rate of interest within due bounds.
If, therefore, we find the laws of any country, in our days, defective
in establishing a facility in securing money on solid property, while
the rate of interest stands higher than is consistent with the good of
trade, and with public credit; we should be slow in finding fault with
such a defect. The motives of statesmen lie very deep; and they are not
always at liberty to explain them. An example of such clogs upon credit
are entails upon lands, and the want of proper registers for mortgages.
Did the dissipation of landed men tend to promote foreign trade, such
clogs would be pernicious: but if the tendency be to promote domestic
luxury only, and thereby raise the price of labour and industry, the
case is widely different. This observation is only by the bye. Our
object at present extends no farther, than to point out, that the
dissipation of landed men, and the credit they have to borrow money,
influences, not a little, the rate of interest in every modern state.
These are the general principles which, arising from things themselves,
without the interposition of a statesman, tend to regulate the rate of
interest in commercial nations.
------------------------------------------------------------------------
CHAP. V.
_Of the Regulation of Interest by Statute._
From the principles deduced in the preceeding chapter, we have seen how,
without the aid of any law, the interest of money, in a trading nation,
becomes determined, from natural causes, and from the irresistible
effects of competition.
But as there is no country in the world so entirely given to commerce,
as not to contain great numbers of people, who are totally unacquainted
with it, a regulation becomes necessary to restrain, on one hand, the
frenzy of those, who, listening to nothing but the violence of their
passions, are willing to procure money at any rate for the gratification
of them, let the political consequences of their dissipation prove ever
so hurtful; and on the other, to protect those who, from necessity, may
be obliged to submit to the heavy oppression of their usurious
creditors.
Laws restraining usury, are directly calculated for the sake of those
two classes, not engaged in commerce, and indirectly calculated for
commerce itself; which otherwise might receive a wound through their
sides.
In entring upon the subject mentioned in the title of this chapter, I
think we may agree in this, that hitherto all regulations made
concerning interest, have been calculated either for bringing it down,
or for preventing its rise. The distress which may come upon a state, by
its falling too low, is a phænomenon which has not yet manifested itself
in any modern state, by any symptom I can at present recollect.
Now if it be true, as I think it has been proved, that the operations of
demand and competition work irresistible effects in determining the rate
of interest in commercial states; the statesman who is about to make a
regulation, must keep these principles constantly in his eye.
If we examine the writings of those who have treated of this subject
with intelligence (among whom, I think, Child has a right to stand in
the foremost rank) we shall find very little attention bestowed upon
that most necessary and ruling principle.
He lays it down as an axiom, that low interest is the soul of trade, in
which he is certainly right; but he seems to think, _that it is in the
power of a legislature, by statute, to bring interest down to that level
which is most advantageous to trade_; and in this I differ from him. I
must do him the justice to say, that he no where directly affirms that
proposition; but by suggesting none of the inconveniences which may
follow upon an arbitrary reduction of interest by statute, he leaves his
reader at liberty to suppose, that the lowering of it is solely in the
hands of a statesman.
It is very plain, from the history he has given us of the successive
rates of interest in England, from 10 to 6 _per cent._ that without the
interposition of statutes, such diminutions would not, _in that period_,
have taken place, from the principle of competition: but I am not so
clear that, _at this time_, when trade is so well understood, and credit
so generally established in many nations of Europe, that a like
administration would work effects equally advantageous.
It is with great diffidence I presume to differ from Child upon this
subject; and I find a sensible satisfaction in perceiving that my
principles bring me so very near to his sentiments on this matter.
The strong arguments in favour of Child’s opinion, are grounded upon
facts. He says, that when interest was brought down by statute, _anno_
1625, from 10 to 8 _per cent._ that in place of producing any bad
effect, it had that of bringing it still lower immediately afterwards;
and the same thing happened, _anno_ 1650, when it was reduced a second
time by statute, from 8 to 6 _per cent._ at which rate it stood at the
time he wrote. These facts I give credit to, and shall now account for
them, from the consequences of sudden revolutions.
When a law is made for the reduction of interest, all debtors
immediately profit by it. Upon this, the creditors must either submit,
or call in their capitals. If they submit, land immediately rises in its
value. If they call in their capitals, they must have an outlet for
lending them out again, beyond the limits of the jurisdiction of the
legislature. Now this outlet was not then to be found; because credit
was no where well established, except in Holland, where interest was
still lower.
They were, therefore, obliged to submit, and thus interest was violently
brought down by statute; and a great advantage resulted from it to the
commercial interests of England.
The subsequent fall of interest, in the natural way, is thus easily
accounted for.
The consequence of lowering the interest, was, that the price of land
rose several years in purchase: the landed men, who had long groaned
under the heavy interest of 10 _per cent._ finding their lands rise from
12 years purchase to 15, upon reducing the interest to 8 _per cent._
sold off part of their lands, and cleared themselves. The natural
consequence of this was, to make money regorge in the hands of the
monied men; to diminish the number of borrowers; and consequently, to
bring the rate of interest still lower.
One sudden revolution produces another. When interest is brought down by
statute, the price of land must rise by a jerk; and landed men will
suddenly profit of the change in their favour. When it falls gently, by
natural revolutions in the state of demand, the effects are more
insensible; the sharper sighted only profit of it; others, from
expectation of a still greater rise in the price of their lands, neglect
to sell in the proper point of time; and may perhaps be disappointed
from a new fluctuation in favour of money. This is at present actually
the case in Great Britain, since the peace of 1762. I write in 1764.
These facts speak strongly in favour of Child’s opinion, that it is
expedient to have recourse directly to the statute, whenever there is a
prospect of advancing the interests of trade by a reduction of interest.
It is impossible to reply to matters of fact: all, therefore, I have to
allege in favour of my own opinion, is, that it is more consistent with
the very principles in which both Child and I agree; it implies no
sudden revolution, and will, in a short time, operate the same effect.
The method of proceeding, according to my principles, is shortly this.
Since it is agreed on all hands, that low interest is the soul of trade,
and the firmest basis of public credit; that it rises in proportion to
the demand of borrowers, and sinks in proportion as money is made to
regorge in the hands of the monied interest;
The statesman should set out by such steps of administration as will
discourage borrowing, in those who employ their money in prodigality and
dissipation, as far as may be consistent with the interest of the lower
classes employed in supplying home consumption, according to the
principles laid down in the second book. He should abstain from
borrowing himself, and even from creating new outlets for money, except
from the most cogent motives. By this he will, in a short time, gently
reduce the rate of interest. Then by statute he may bring it down a
little, but not so very low as the foregoing operations may have reduced
it; contenting himself with having farther restricted the extent of the
ordinary fluctuations.
As for example: let us suppose interest limited by law to 5 _per cent._
and that by good management the state may be enabled to borrow easily at
3 _per cent._ I believe there would result a notable advantage, in
reducing the legal rate to 4 _per cent._ and were it brought down to 3
_per cent._ there might follow a very great inconvenience to landed men,
in case a war should suddenly occasion a revolution in favour of money.
The difference then between Child and me, is, that I am more scrupulous
than he, in introducing restraint into political oeconomy; and my only
reason against applying the statute, as he proposes, is for fear of the
immediate bad effects which might follow (in many ways impossible to be
foreseen) upon a sudden and violent revolution, in a point so
excessively delicate as public credit.
In his days, credit was not so well established, nor was it stretched as
at present: it was more accustomed to violent shocks, and could bear a
rougher treatment. But in order to come the better to a thorough
knowledge of this matter, let us examine into what might be the
consequence, if Great Britain should, at this time, bring down, by
statute, the rate of interest _below the level of the stocks_, which I
take to be the best rule of determining the present value of money; and
this is also the best method of examining the expediency of Child’s
method of reducing interest, under the present combination of all our
political circumstances.
------------------------------------------------------------------------
CHAP. VI.
_What would be the Consequence of reducing, by a British Statute, the
legal Interest of Money below the present level of the Stocks._
When Great Britain borrows money upon the public faith, the rate of
interest is always stipulated, and these stipulations must be
religiously fulfilled, or credit will be at an end.
The regulations then proposed to be made, must only refer to contracts
of loan entred into by private parties.
The current value of money, I think, is best to be determined by the
price of stocks. If a 4 _per cent._ sells at par, money may be said to
be then at 4 _per cent._ If the same stock falls to 89, then the value
of money rises to near 4½: if the same stock rises to 114, then the
value of money falls to about 3½; and so in proportion.
According, therefore, as stock is found to rise, the price of money
falls, and _vice versa_.
Suppose, then, the price of money to be at 4 _per cent._ and that
government should pass a law, forbidding any man to lend at above 3 _per
cent._ what would be the consequence? This is exactly the expedient
proposed by Child: money then was at 6 _per cent._ and he proposes, _by
a law_, to bring it, all at once, to 4, without alledging that money was
then commonly got by private convention at so low a rate.
Would not the consequence be, that the creditors of private people would
demand their money, in order to get 4 _per cent._ in buying stock, and
would not this additional demand for stocks make them rise? I answer in
the affirmative, unless money could be employed abroad, so as to produce
at least 4 _per cent._ to the lenders, free of all charge of commission,
&c. If it could not, I have little doubt, but that money would soon fall
to the legal interest of 3 _per cent._ land would rise to 40 years
purchase; and landed men would profit of the rise, as Child says was the
case in his time. The whole inconvenience would be limited to the
immediate effects of the sudden revolution; which would occasion so
great a run upon the landed interest, as to reduce them to an utter
incapacity of answering it. This might be, in some measure, prevented,
by a clause in the act, allowing a certain time for the liquidation of
their debts. But who will pretend to foretell the immediate consequences
of so great a stagnation of credit, and borrowing on land security? The
purses of all monied people, would, for some time at least, be fast shut
against their demand. What a shock again, would this be to all inland
trade, what a discouragement to all the manufacturing interest, what
distress upon all creditors for accounts furnished, and upon those who
supply daily wants! I think, even supposing that in a year or two, the
first effects might come to disappear, and a notable advantage result,
in the main, to the commercial interest of Great Britain, yet the
distress in the interval might prove so hurtful, as to render it quite
intolerable. The common people who live by the luxury of the rich, in
the city of London, and who are constantly acted upon by the immediate
feelings of present inconveniences, might lose all patience; and being
blown into a ferment, by the address of the monied interest (whose
condition would be made to suffer by the scheme) might throw the state
into confusion, and impress the nation with a belief, that high interest
for money, in place of being hurtful, was essential to their prosperity.
I have said above, that supposing the money drawn from debtors, could
not be placed abroad, free of all deductions, at a rate equal to the
then value of money (supposed, for the sake of an example, to be at 4
_per cent._) that then money would fall to 3 _per cent._ and the stocks
would rise in proportion.
But let us suppose (what perhaps is the matter of fact) that the
extensive operations of trade and credit, do actually fix an average for
the price of stocks, from the value of money in other nations in Europe.
Would not then the consequence of bringing down the rate of legal
interest, below that level, be, to send out of the kingdom all the money
now circulating on private security, real and personal? Would not this
destroy all private credit at one blow? Would it not have the effect of
preventing, among individuals, the loan upon interest altogether? What
would become of the bank of England, and all other banks, whose paper in
circulation is all in the hands of private people? Is not every man who
has a bank note, a creditor on the bank, and would not the same interest
which moves other creditors to exact their debts, under such
circumstances, also move many holders of bank notes, to demand payment
of them? Would not a run of that nature, only for a few weeks, throw the
whole nation into the most dreadful distress? May we not even suppose,
that upon such an occasion, the monied interest (_from a certainty of
disappointing the intention of government in making the law_) might form
a combination among themselves to lock up their money, even although it
should remain dead in their hands for a few months? What would become of
the improvement of land? Is there an industrious farmer any where to be
met with, who does not borrow money, which he can so profitably turn to
account upon his farm, even though he receives it at the highest legal
interest? These and many more inconveniences _might_ manifest
themselves, were government to force down the value of money, contrary
to the ordinary operations of demand and competition: and to what
purpose have recourse to authority, when it is most certain, that
without any such expedient the same end may be compassed?
If it be true, as I believe it is, that in states where credit is so
well established, that their funds or public debts are commonly
negotiated abroad, there is an average fixed for the value of money, by
the operations of credit over the commercial world: and if it be true,
that no law can be framed so as to restrain mercantile people, and those
who make a trade of money, from turning it to the best account; then all
that should be proposed by government, is, to preserve the value of it
at home, within that standard. For which purpose, nothing more is
necessary than to prevent the competition of the dissipating class of
inhabitants, from disturbing the rate which commerce may establish from
time to time. This is accomplished by the methods above hinted at, and
which in the next chapter shall be more largely insisted on. If, by
prudent management, the _conventional_ rate of interest, can thus be
brought below the _legal_, then there will be no harm in diminishing the
latter by statute, not however _quite_ so low as the conventional
standard; but to leave a reasonable latitude for gentle fluctuations
above it. From what I have said, I still think I had reason to object to
Child’s plan for forcing down the interest by statute: and had he lived
at this time, I am persuaded he would have come into that opinion.
------------------------------------------------------------------------
CHAP. VII.
_Methods of bringing down the Rate of Interest, in Consequence of the
Principles of Demand and Competition._
I hope the arguments used in the foregoing chapter will not be construed
as an apology for the high interest of money.
I entirely agree with Sir Josiah Child, that low interest is the soul of
trade; the most active principle for promoting industry, and the
improvement of land; and a requisite, without which it is hardly
possible that foreign commerce can long be supported.
This proposition I take to be at this time universally admitted to be
true; and did there remain, concerning it, the vestige of a doubt in the
mind of any one, the writings of many, much more capable than I can
pretend to be, and among the rest the author just now cited, are
sufficiently capable to remove it. I shall not therefore trouble my
reader with a chapter upon that head, but only observe, that the terms
_high_ and _low_ are constantly relative. Here the relation must be
understood to regard other states, because when we speak of a _rate_ of
interest, we are supposed to mean something general in the country we
are speaking of: accordingly, if we could suppose that, within the same
state, the rate of interest should be lower in one city than any where
else, that circumstance would give an advantage to that city in all its
mercantile operations.
I must farther observe, for the sake of connecting this part of our
subject with our general plan, that the low interest for money is most
essential to such states as carry on the most extensive foreign
commerce.
In the infancy of industry, and before trade comes to be established, it
is very natural that the coin of the country should be found in a great
measure locked up in treasures: high interest tends to bring it forth,
and in that respect works a good effect.
In proportion as alienation augments, money comes to be multiplied, by
the melting down of solid property, as has been explained; and then the
business of a statesman is to contrive expedients for bringing the rate
of it as low as possible, in order to support foreign trade, and to
rival all neighbouring nations, where interest is higher. When foreign
trade again comes to decline, from the multiplication of abuses
introduced by luxury, low interest still continues useful, for
supporting public credit, so necessary for defending a nation against
her enemies.
If money consisted only in the precious metals, which are not to be
found in every country, but must be purchased with the produce of
industry, and brought from far; and if no other expedient could be
fallen upon to supply their place for the uses of circulation; then the
possessors of these metals would in a manner be masters to establish
what rate of interest they thought fit for the use of them.
But if that be not the case, and if money can be made of paper, to the
value of all the solid property of a nation, (so far as occasion is
found for it, by the owners of that property) the use of the metals
comes to be in a manner reduced to that of serving as a standard, for
ascertaining the value of the denominations of money of accompt; perhaps
for facilitating the circulation of small sums, and for paying a balance
of trade to other nations.
When this is the case, a statesman has it in his power to increase or
diminish the extent of credit and paper money in circulation, by various
expedients, which greatly influence the rate of interest.
The progress of credit has been very rapid since the beginning of this
century. This has been almost entirely owing to the mechanical
combinations of trading men. Lawgivers have hitherto had but imperfect
notions concerning the nature of it; and there still remains, in the
womb of nature, some mighty genius, born to govern a commercial nation,
who alone will be able to set it on its true principles. Let us in the
mean time speculate concerning them.
We have said, and every body feels, that interest falls in proportion to
the redundancy of money to be lent.
Now what is this money but property, of one kind or other, thrown into
circulation? I speak of trading nations, who are not confined to the
quantity of their specie alone.
When a man of property wants money, does he not go to a bank, which
lends upon mortgage, and by pledging his security, does he not receive
money, which is in the same instant created for his use? Do not those
notes circulate as long as they are found necessary for carrying on the
affairs of the nation? that is to say, the accompts of debtors and
creditors of all denominations; and as soon as the quantity of them
exceeds that proportion, they stagnate, and return on the debtors in
them, (the bank) who is enabled to realize them, because the original
security is still in their hands, which was at first pledged when the
notes were issued. This realization is commonly made in the metals;
because they are the money of the world: they are real and true riches,
as much as land; and they have this advantage over land, that they are
transportable every where.
Now, does it not appear evident, that what we have been describing is a
round-about operation, which it is possible to shorten?
I beg of my reader, that he may attend to one thing; which is, that I am
not here treating of, or proposing a plan, but labouring in the
deduction of principles in an intricate subject.
I say, when landed men go to such a bank, and receive paper for a land
security, that this operation may be shortened.
Do not the notes he gets stand (though that is not expressed) upon the
security of his land? Now, can any man assign any other reason but
custom, why his own notes, carrying expresly in their bosom the same
security, might not be issued, without his being obliged to interpose
the bank between the public and himself: And for what does he pay that
interest? Not that he has gratuitously received any value from the bank;
because in his obligation he has given a full equivalent for the notes;
but the obligation carries interest, and the notes carry none. Why?
Because the one circulates like money, the other does not. For this
advantage, therefore, of circulation, not for any additional value, does
the landed man pay interest to the bank.
Had landed men, and not merchants, invented this method of turning their
property into circulation, and had they been all assembled in one body,
with a legislative authority, I imagine they would have had wit enough
to find out that a land bank was a thing practicable in its nature.
Suppose they had agreed that all their lands should be let by the acre,
and that land property should be esteemed at a certain number of years
purchase, in proportion to the rate of interest at the time, where would
be the great difficulty in paying in lands?
This is only a hint, to which a thousand objections may be made, as
matters stand: all I say, is, that there is nothing here against
principles; and though there might, in every way such a plan could be
laid down, result inconveniencies to the landed interest, yet still
these inconveniencies would hardly counterbalance that of their being
obliged to pay interest for every penny they borrow.
It is demanded, what advantage would result to the nation from such a
regulation?
I answer, that by it all the borrowings of landed men would be struck
out of the competition at the money-market. The money’d interest alone
would borrow among themselves for the purposes of trade, (for money’d
men do not borrow to squander) and landed men would consequently pay
with their own paper, in every case, where now they borrow in order to
pay. Thus interest would be regulated by the demands of trade, and the
rate of it would not be disturbed by the competition of spendthrifts.
Who can say how far the consequences of such a scheme might reach? Might
not landed men begin in time to issue notes by way of loan, at a very
inconsiderable interest? But I do not incline to carry my speculations
farther: perhaps what has been said may appear sufficiently aerial.
If a statesman shall find every modification of this idea impracticable;
either from his own want of power, or of combination, or, which is more
probable, from the opposition of the money’d interest, he must take
other measures for striking out, as much as possible, the competition of
spendthrifts at the money-market. Entails, and lame securities, are good
expedients; though they are productive of many inconveniencies. His own
frugal œconomy in state affairs will go much farther than any such
trifling expedients.
Did a nation enjoying peace, although indebted perhaps 140 millions
sterling, begin by paying off but 2 _per cent._ of their capital yearly,
besides the current interest; while no neighbouring state was borrowing
any; what would interest fall to in a short time! It may be answered,
that the consequence would be, to enrich other nations; because the
regorging money would be sent abroad. Is any state ever enriched by
their borrowing? And in what does such lending to foreigners differ from
the nation’s paying off their foreign creditors? Will not the return of
interest from abroad compensate, _pro tanto_, the sums sent out for the
like purpose?
But if it be said, that the consequence will be to enable other nations
to bring down their own rate of interest; I allow it to be so; and so
much the better, as long as it remains proportionally lower with us;
which it must do, as long as we can lend abroad. We have said, and I
believe with truth, that as credit is now extended, a general average is
struck every where upon the value of money: consequently, the lower
interest is found abroad, the lower still it will remain at home, as
long as merchants and exchangers subsist.
From this circumstance of the average on the rate of interest, the Dutch
must, I think, have lost the great advantage they formerly enjoyed, from
the low rate of it in Holland, in proportion to their neighbours.
In Child’s time, they were familiarly buying up sugars in London, above
the price paid by English sugar-bakers; and, notwithstanding the
additional freight and charges, they grew rich by their trade, while the
others were hardly making any profit. This he accounts for, from the low
rate of their interest. He supposes both Dutch and English to have
carried on this trade with borrowed money; for which the first paid 3
_per cent._ and the other 6 _per cent._
But at present, were it possible to get 6 _per cent._ for money in
London, what Dutchman would lend his father a shilling at 3 _per cent._?
The English stocks are as currently bought and sold, nay, all the
stockjobbing tricks are practised with the same subtlety at Amsterdam as
in Change-Alley: from which I conclude, that a great part of the
advantage of low interest is now lost to that nation; and I conclude
farther, that it is the common interest of all trading nations to bring
it as low as possible every where.
Another cause of high interest proceeds from certain clogs laid upon
circulation, which proceed merely from custom and prejudice. Of this
nature is the obligation of debtors to pay in the metals, nothing but
coin being a legal tender.
The only foundation for such a regulation was the precariousness of
credit in former times. Were all the circulating paper in a nation
secured by law, either upon the lands or revenue of the country
appropriated for that purpose, there could be no injustice or
inconvenience in making paper (so secured) a legal tender in all
payments. Again, how extraordinary must it appear to any reasonable man,
that the same paper which passes on one side of a river, should not pass
on its opposite bank, though running through the same country?
The reason indeed is very plain: the subaltern jurisdictions are
different; and the debtors in the paper are different: but if the paper
of both stood upon a security equally good, what is to hinder both to be
received as a legal tender in all payments over the kingdom? Should not
little private objects of profit among bankers (who are the servants of
the state, and who are so well paid for their service) be over-ruled,
when the consequences of their disputes are found to be so hurtful? But
of this more, when we come to speak of banks.
The only occasion where coin is necessary in the liquidation of paper,
is for payment of the balance of trade with foreign nations. Of this
also we shall treat more at large, when we come to the doctrine of
exchange. But surely nothing is so ill judged, as to create an imaginary
balance within the same state; or rather, to permit money-jobbers to
create it; at the expence of raising interest, and hurting trade, in the
very places where it stands in the greatest need of encouragement.
From these principles, and others which naturally flow from them, may a
statesman steer a very certain course, towards bringing the rate of
interest as low as the prosperity of trade requires, or the principles
of double competition between borrowers and lenders will permit.
------------------------------------------------------------------------
CHAP. VIII.
_Is the Rate of Interest the sure Barometer of the State of Commerce?_
Some political writers are fond of every expedient to reduce within a
narrow compass many questions, which being involved in intricate
combinations, cannot be reduced to one principle. This throws them into
what I call systems; of which we have an example in the question now
before us.
There is nothing more difficult than to determine when commerce runs
favourably, and when unfavourably for a nation. This would not be the
case, were the rate of interest the just barometer of it. I have found
it however advanced, that nothing more is necessary to be known, in
order to estimate the relative profits upon the foreign trade of two
nations, than to compare the common rate of interest in both, and to
decide the preference in favour of that nation where it is found to be
lowest.
We may say of this proposition, as of the course of exchange; the
lowness of interest and exchange are both exceedingly favourable to
trade; but they are no adequate measure of the profits arising from it.
The best argument in favour of this opinion with regard to interest is,
that the nation which sells the cheapest at foreign markets is
constantly preferred; and, consequently, where the use of money is the
lowest, the merchant can sell the cheapest.
I answer, that this consequence _would_ be just, were all trade carried
on with borrowed money, and were the difference of the price of the
materials or first matter, the ease in procuring them, the promptitude
of payments, the industry of the manufacturer, and his dexterity,
reckoned for nothing. But such advantages are frequently found in these
articles, as to be more than sufficient to counterbalance the additional
interest which is paid for the money employed in trade. This is so true,
that we see the dexterity alone of the workman (living in an expensive
capital, where the charge of living may be double of what it is in the
country) enabling him to undersell his competitors every where: the same
may be true with regard to the other articles. Farther, how far is it
not from truth to say, that all _trade_ is carried on with borrowed
money? When the term _trade_ here made use of, is properly understood,
we shall see, that a very inconsiderable part of its object is carried
on with borrowed money, in any country in Europe; and that part which is
carried on with borrowed money is not so much clogged by the high rate
of interest, as by want of punctuality in payments. A merchant who can
turn his money in three months, borrows as cheaply at 6 _per cent._ as
another who turns his in six months, when he borrows at 3 _per cent._
The object of trade is produce and manufacture. If any one will consider
the value of these two articles, before they come into the hands of
merchants, and compare this with the money borrowed by farmers and
manufacturers, in order to bring them to market, the proportion will be
very small.
Do we not see every day, that ingenious workmen, who obtain credit for
very small sums, are soon enabled, by the means of their own industry,
to produce a surprizing value in manufactures, and not only to subsist,
but to increase in riches? The interest they pay for the money borrowed
is inconsiderable, when compared with the value, created (as it were) by
the proper employment of their time and talents.
If it be said, that this is a vague assertion, supported by no proof; I
answer, that the value of a man’s work may be estimated by the
proportion between the manufacture when brought to market, and the first
matter. Nothing but the first matter, and the instruments of
manufacture, can be considered as the objects of borrowed money; unless
we go so far as to estimate the nourishment, and every expence of the
manufacturer, and suppose that these are also supplied from borrowed
money. To affirm that, would be turning arguments into cavil.
The object, therefore, of borrowed money for carrying on trade, is more
relative to the merchant than to the manufacturer. Borrowing is
necessary for collecting all this product and manufacture into the hands
of merchants. This, no doubt, is very commonly the operation of credit:
interest of money, here, comes in, to indemnify the giver of credit, for
the use of his money: but this interest is only due from the time the
borrower pays those from whom he collects, to the time he receives
payment from those to whom he sells. This interval it is of the highest
importance to the merchant to shorten. In proportion as it is long, and
in proportion to the rate of interest, he must raise his profits; and in
proportion as payments are quick and regular, and interest low, he may
diminish them. Whether merchants do regulate their profits, in all
commercial nations, according to the exact proportion of the respective
rates of interest, and promptitude of payments among them; or whether
these are determined by the circumstances of demand and competition in
the several foreign markets where the trade is carried on, I leave to
merchants to determine. All I shall remark is, that a well founded
credit, and prompt payments, will do more service to trade, than any
advantage trading men can reap from the different rate of interest in
different countries.
It must not be concluded from this, that low interest is not a very
great advantage to trade; all I contend for, is, that it is not the
barometer of it.
Another circumstance which puts nations, in our days, much more on a
level than they were in former times, I have already hinted at. It is
_that general average_ which the great loads of national debts, and the
extension of credit, through the several nations of Europe, who pay
annually large sums of interest to their creditors, has established. Let
me suppose the Dutch, for example, to have fixed, by placard, the rate
of their interest at 3 _per cent._ I say, that so soon as the _general
average_ of interest comes to stand above that rate, from the price of
public funds in England and France, we may safely conclude, that their
trade cannot be carried on with any very considerable sum of money
borrowed at 3 _per cent._ The consequence then must be, to send the
money which regorges in the hands of the frugal Dutch, into other
countries, where it can produce a better return, exclusive of all
expences of remitting and drawing. What the consequences of this lending
to foreigners may be to Holland, shall be afterwards examined.
To conclude; I believe it will be found, that what has led some to
believe that low interest is the barometer of commerce, has been owing
to this; that in some of the most commercial countries and cities
interest has been found to be lower than in great kingdoms: but _that_,
I imagine, is entirely owing to the frugality of their manners, which
cuts off the borrowing of the rich for the sake of dissipation. When
this is accomplished, trade alone being what absorbs the stagnations of
the frugal, the price of interest will fall to that rate which is the
best proportioned to the profits upon it: but this also will be less and
less the case every day, in proportion to the credit and circulation of
public funds in different nations.
------------------------------------------------------------------------
CHAP. IX.
_Does not Interest fall in Proportion as Wealth increases?_
I answer in the affirmative: providing it be supposed that dissipation
does not increase in proportion to the wealth. Now in a general
proposition, such as this which stands at the head of our chapter, that
very necessary proviso is not attended to, and thus people are led to
error. It is the manners of a people, not their external circumstances
as to riches, which render them frugal or extravagant. What, therefore,
depends upon the spirit of a people, cannot be changed, but in
consequence of a change of that spirit.
If the rate of interest be high, from a taste of dissipation, let
foreign trade throw in what loads of money it may, interest will still
stand high, until manners change. Every class of a people has their
peculiar spirit. The frugal merchant will accumulate wealth, and the
prodigal lord will borrow it. In this situation, internal circulation
will be rapid, and lands will shift hands. If this revolution should
prove a corrective to dissipation, by vesting property in those who have
contracted a firm habit of frugality, then an augmentation of wealth may
sink the rate of interest. But if, on the contrary, the laws and manners
of the country do distinguish classes by their manner of living, and
mode of expence, it is ten to one that the industrious and frugal
merchant will put on the prodigal gentleman, the moment he gets into a
fine country seat, and hears himself called Your honour. In certain
countries, the memory of past industry carries a dreg along with it,
which nothing but expensive living has power to purge away.
Let this suffice at present upon the subject of interest: it is so
connected with the doctrine of credit, that it will recur again at
almost every step as we go along.
END OF THE FIRST PART.
------------------------------------------------------------------------
AN
INQUIRY
INTO THE
PRINCIPLES OF POLITICAL OECONOMY.
------------------------------------------------------------------------
BOOK IV. | OF CREDIT AND DEBTS.
PART IV. | OF PUBLIC CREDIT.
------------------------------------------------------------------------
BOOK IV. | OF CREDIT AND DEBTS.
PART II.
OF BANKS.
------------------------------------------------------------------------
CHAP. I.
_Of the various Kinds of Credit._
We have already pointed out the nature of credit, which is confidence;
and we have deduced the principles which influence the rate of interest,
the essential requisite for its support.
We come now to treat of domestic circulation; where we are to deduce the
principles of banking. This is the great engine calculated for carrying
it on.
That I may, with order, investigate the many combinations we shall here
meet with, I must point out wherein banks differ from one another in
point of policy, as well as in the principle upon which their credit is
built.
If we consider them relative to their policy, I divide them into banks
of circulation, and banks of deposit. This every one understands.
If according to their principle, they are established either on
_private_, or _mercantile_, or _public credit_.
This last division I must attend to in the distribution of what is to
follow; and therefore it is proper to set out by explaining what I
understand by the terms I have here introduced.
1_mo_, Private credit. This is established upon a security, real or
personal, of value sufficient to make good the obligation of repayment
both of capital and interest. This is the most solid of all.
2_do_, Mercantile credit. This is established upon the confidence the
lender has, that the borrower, from his integrity and knowledge in
trade, may be able to replace the capital advanced, and the interest due
during the advance, in terms of the agreement. This is the most
precarious of all.
3_tio_, Public credit. This is established upon the confidence reposed
in a state, or body politic, who borrow money upon condition that the
capital shall not be demandable; but that a certain proportional part of
the sum shall be annually paid, either in lieu of interest, or in
extinction of part of the capital; for the security of which, a
permanent annual fund is appropriated, with a liberty, however, to the
state to liberate itself at pleasure, upon repaying the whole; when
nothing to the contrary is stipulated.
The solidity of this species of credit depends upon circumstances.
The difference between the three kinds of credit lies more in the object
of the confidence, and the nature of the security, than in the condition
of the borrower. Either a private man, a merchant, or a state, may
pledge, for the security of a loan, a real or a moveable security, with
an obligation to refund the capital. In this case, the obligation stands
upon the solid basis of private credit.
Either a private man, a merchant, or a state, may strike out projects
which carry a favourable appearance of success, and thereupon borrow
considerable sums of money, repayable with interest. In this case, the
obligation stands upon a mercantile credit.
Either a private man, a merchant, or a state, may pledge (for the
security of money borrowed) a perpetual annual income, the fund of which
is not their property, without any obligation to refund the capital:
such obligations stand upon the principles of public credit.
I allow there is a great resemblance between the three species of credit
here enumerated: there are however some characteristic differences
between them.
1_mo_, In the difficulty of establishing and supporting them.
Private credit is inseparable, in some degree, from human society. We
find it subsisting in all ages: the security is palpable, and the
principles on which it is built are simple and easy to be comprehended.
Public credit is but a late invention: it is the infant of commerce, and
of extensive circulation. It has supplied the place of the treasures of
old, which were constant and ready resources to statesmen in cases of
public distress: the security is not palpable, nor readily understood,
by the multitude; as it rests upon the liability of certain fundamental
maxims of government. Mercantile credit is still more difficult to
establish; because the security is the most precarious of any: it
depends upon opinion and speculation, more than upon a fund provided for
repayment of either capital or interest.
2_do_, They differ in the nature of the security and object of
confidence.
Private credit has a determinate object of confidence, viz. the real
existence of value in the hands of the debtor, sufficient to satisfy
both capital and interest. Public credit has the visible security of a
fund appropriated for the perpetual payment of the interest. Mercantile
credit depends wholly upon the integrity, capacity, and good fortune of
the debtor.
3_tio_, The third difference is with regard to the ease of transfer.
Public debts stand generally on the same bottom. No part of the same
fund is better than another: the price of them is publicly known, and
the securities are laid in the most convenient way for transfer, that
is, circulation, without consent of the debtor. This is far from being
the case in private securities. Nor is it the case in the mercantile,
except in bills payable to order, in which case alone, the creditor can
effectually transfer without the consent of the debtor.
4_to_, The fourth difference is discovered in the stability of the
confidence.
Nothing can shake private credit, but an appearance of insolvency in the
very debtor. But the bankruptcy of one considerable merchant, will give
a very great shock to mercantile credit over all Europe: and nothing
will hurt public credit, so long as the stipulated interest continues
regularly to be paid, and so long as the funds appropriated for that
payment remain entire.
From what has been said, I hope the three species of credit have been
sufficiently explained; and from what is to follow, we shall feel the
utility of this distribution.
------------------------------------------------------------------------
CHAP. II.
_Of private Credit._
Private credit is either real, personal, or mixed.
Real security or credit, every body understands. It is the object of
law, not of politics, to give an enumeration of its different branches.
By this term, we understand no more than the pledging an immoveable
subject for the payment of a debt. As by a personal security we
understand the engagement of the debtor’s whole effects for the relief
of his creditors. The mixed, I have found it necessary to superadd, in
order to explain with more facility, the security of one species of
banks. The notes issued by banks upon private credit, stand upon a mixed
security: that is, both real and personal. Personal, so far as they
affect the banker, and the banking stock pledged for the security of the
paper: and in the second place, upon the securities, real and personal,
granted to the banker for the notes he lends, which afterwards enter
into circulation.
The ruling principles in private credit, and the basis on which it
rests, is the facility of converting, into money, the effects of the
debtor; because the capital and interest are constantly supposed to be
demandable. The proper way, therefore, to support this sort of credit to
the utmost, is to contrive a ready method of appretiating every subject
affectable by debts; and secondly, of melting it down into symbolical or
paper money.
In former times, when circulation was confined, the scheme of melting
down the property of debtors, for the payment of creditors, was
impracticable; and accordingly we see that capitals secured on land
property were not demandable. This formed another species of credit,
different from any we have mentioned; which only differed from public
credit in this, that the solid property producing the income, was really
in the hands of the debtor. This subdivision we have omitted, as its
basis rests solely upon the regular payment of the interest. Of this
nature are the contracts of constitution in France, and the old
infeftments of annual rent in Scotland. There are few nations, I
believe, in Europe, where a vestige, at least, of this kind of security
does not remain.
In order, then, to carry private credit to its greatest extent, all
entails upon lands should be dissolved; all obligations should be
regularly recorded in public registers; the value of all lands should be
ascertained, the moment any security is granted upon them; and the
statesman should interpose between parties, to accelerate the
liquidation of all debts, in the shortest time, and at the least expence
possible.
Although this method of proceeding be the most effectual to secure, and
to extend private credit, yet it is not, at all times, expedient to have
recourse to it; as we have abundantly explained in the 27th chapter of
the second book; and therefore I shall not here interrupt my subject
with a needless repetition.
------------------------------------------------------------------------
CHAP. III.
_Of Banks._
In deducing the principles of banks, I shall do the best I can to go
through the subject systematically.
I have divided credit into three branches, private, mercantile, and
public. This distribution will be of use on many occasions, and shall be
followed as far as it will go, consistently with perspicuity: but as I
have often observed of subjects of a complex nature, they cannot be
brought under the influence of a few general principles, without running
into the modern vice of forming systems, by wire-drawing many relations
in order to make them answer.
The great operations of domestic circulation are better discovered by an
examination of the principles upon which we find banking established,
than by any other method I can contrive. It has been by inquiry into the
nature of those banks which are the most remarkable in Europe, that I
have gathered the little knowledge I have of the theory of circulation.
This induces me to think that the best way of communicating my thoughts
on that subject, is to lay down the result of my inquiries relative to
the very object of them.
After comparing the operations of different banks in promoting
circulation, I find I can divide them, as to their policy, into two
general classes, viz. those which issue notes payable in coin to bearer;
and those which only transfer the credit written down in their books
from one person to another.
Those which issue notes, I call banks of circulation; those which
transfer their credit, I call banks of deposit.
Both indeed may be called banks of circulation, because by their means
circulation is facilitated; but as different terms serve to distinguish
ideas different in themselves, those I here employ, will answer the
purpose as well as any others, when once they are defined; and
circulation undoubtedly reaps far greater advantages from banks which
issue notes transferable every where, than from banks which only
transfer their credit on the very spot where the books are kept.
I shall, according to this distribution, first explain the principles
upon which the banks of circulation are constituted and conducted,
before I treat of the other.
This will lead me to avail myself of the division I have made of credit,
into private, mercantile, and public: because, according to the purposes
for which a bank is established, the ground of confidence, that is, the
credit of the bank, is settled upon one or other of them.
In countries where trade and industry are in their infancy, credit must
be little known; and they who have solid property, find the greatest
difficulty in turning it into money, without which industry cannot be
carried on, as we have abundantly explained in the 26th chapter of the
second book; and consequently the whole plan of improvement is
disappointed.
Under such circumstances, it is proper to establish a bank upon the
principles of private credit. This bank must issue notes upon land and
other securities, and the profits of it must arise from the permanent
interest drawn for the money lent.
Of this nature are the banks of Scotland. To them the improvement of
that country is entirely owing; and until they are generally established
in other countries of Europe, where trade and industry are little known,
it will be very difficult to set those great engines to work.
Although I have represented this species of banks, which I shall call
_banks of circulation upon mortgage_, as peculiarly well adapted to
countries where industry and trade are in their infancy, their
usefulness to all nations, who have upon an average a favourable balance
upon their trade, will sufficiently appear upon an examination of the
principles upon which they are established.
It is for this reason, that I have applied myself to reduce to
principles all the operations of the Scotch banks, while they were in
the greatest distress imaginable, from the heavy balance the country
owed during the last years of the late war, and for some time after the
peace in 1763. By this I flatter myself to do a particular service to
Scotland, as well as to suggest hints which may prove useful, not only
to England, but to all commercial countries, who, by imitating this
establishment, will reap advantages of which they are at present
deprived.
For these reasons, I hope the detail I shall enter into with regard to
Scotland, will not appear tedious, both from the variety of curious
combinations it will contain, as also from the lights it will cast upon
the whole doctrine of circulation, which is the present object of our
attention.
In countries where trade is established, industry flourishing, credit
extensive, circulation copious and rapid, as in England, banks upon
mortgage, however useful they may prove for other purposes, would not
answer the demands of the trade of London, and the service of
government, so well as the bank of England.
The ruling principle of that bank, and the ground of their confidence,
is mercantile credit. The bank of England does not lend upon mortgage,
nor personal security: their profits arise from discounting bills; loans
to government, upon the faith of taxes, to be paid within the year and
upon the credit cash of those who deal with them.
A bank such as that of England, cannot therefore be established, except
in a great wealthy mercantile city, where the accumulation of the
smallest profits amount, at the end of the year, to very considerable
sums.
In France, under the regency of the Duke of Orleans, there was a bank
erected upon the principles of public credit. The ground of confidence
there, and the only security for all the paper they issued, were the
funds appropriated for the payment of the interest of the public debts.
It is for the sake of order and method, that I propose to explain the
principles of banking, according to this distribution. I must however
confess, that although I represent each of them as having a cause of
confidence peculiar to itself, to wit, either private, mercantile, or
public credit; yet we shall find a mixture of all the three species of
credit entring into the combination of every one of them.
Banking, in the age we live, is that branch of credit which best
deserves the attention of a statesman. Upon the right establishment of
banks, depends the prosperity of trade, and the equable course of
circulation. By them [6]_solid property_ may be melted down. By the
means of banks, money may be constantly kept at a due proportion to
alienation. If alienation increases, more property may be melted down.
If it diminishes, the quantity of money stagnating, will be absorbed by
the bank, and part of the property formerly melted down in the
securities granted to them, will be, as it were, consolidated anew.
These must pay for the country the balance of their trade with foreign
nations. These keep the mints at work; and it is by their means,
principally, that private, mercantile, and public credit, is supported.
I can point out the utility of banks in no way so striking, as to recall
to mind the surprizing effects of Mr. Law’s bank, established in France,
at a time when there was neither money or credit in the kingdom. The
superior genius of that man produced, in two years time, the most
surprizing effects imaginable; he revived industry; he established
confidence; and shewed to the world, that while the landed property of a
nation is in the hands of the inhabitants; and while the lower classes
are willing to be industrious, money never _can_ be wanting. I must now
proceed in order, towards the investigation of the principles which
influence this intricate and complicated branch of my subject.
Footnote 6:
Solid property, here, is not taken in the strictest acceptation. In
countries of commerce, where banks are generally established, every
denomination of good personal security, may be considered as solid
property. Those who have personal estates may obtain credit from banks
as well as landed men; because these personal estates are secured
either on lands, or in the funds, or in effects which contain as real
a value as lands, and these being affected by the securities which the
proprietors grant to the bank, may with as much propriety be said to
be melted down, as if they consisted in lands. In subjects of this
nature, it is necessary to extend our combinations, in proportion to
the circumstances under which we reason.
------------------------------------------------------------------------
CHAP. IV.
_Of Banks of Circulation upon Mortgage or private Credit._
Banks of circulation upon mortgage or private credit, are those which
issue notes upon private security, payable to bearer on demand, in the
current coin of the nation. They are constituted in the following
manner.
A number of men of property join together in a contract of banking,
either ratified or not by public authority, according to circumstances.
For this purpose, they form a stock which may consist indifferently of
any species of property. This fund is engaged to all the creditors of
the company, as a security for the notes they propose to issue. So soon
as confidence is established with the public, they grant credits, or
cash accompts, upon good security; concerning which they make the proper
regulations. In proportion to the notes issued in consequence of those
credits, they provide a sum of coin, such as they judge to be sufficient
to answer such notes as shall return upon them for payment. Nothing but
experience can enable them to determine the proportion between the coin
to be kept in their coffers, and the paper in circulation. This
proportion even varies according to circumstances, as we shall
afterwards observe.
The profits of the bank proceed from the interest paid upon all the
securities which have been granted to it, in consequence of credits
given, and which remain with it unretired.
Out of which must be deducted, first, the charge of management;
secondly, the loss of interest for all the coin they preserve in their
coffers, as well as the expence they are put to in providing it; and
thirdly, the expence of transacting and paying all balances due to other
nations.
In proportion, therefore, as the interest upon the bank securities
exceeds the loss of interest on the coin in the bank, the expence of
management, and of providing funds abroad to pay balances, in the same
proportion is their profit; which they may either divide, accumulate, or
employ, as they think fit.
Let it be observed, that I do not consider the original bank stock, or
the interest arising from _that_, as any part of the profits of the
bank. So far as regards the bank, it is their original property; and so
far as regards the public, it serves for a collateral security to it,
for the notes issued. It becomes a pledge, as it were, for the faithful
discharge of the trust reposed in the bank: without such a pledge, the
public could have no security to indemnify it, in case the bank should
issue notes for no permanent value received. This would be the case, if
they thought fit to issue their paper either in payment of their own
private debts, for articles of present consumption; or in precarious
trade.
When paper is issued for no value received, the security of such paper
stands alone upon the original capital of the bank, whereas when it is
issued for value received, that value is the security on which it
immediately stands, and the bank stock is, properly speaking, only
subsidiary.
I have dwelt the longer upon this circumstance, because many, who are
unacquainted with the nature of banks, have a difficulty to comprehend
how they should ever be at a loss for money, as they have a mint of
their own, which requires nothing but paper and ink to create millions.
But if they consider the principles of banking, they will find that
every note issued for value consumed, in place of value received and
preserved, is neither more or less, than a partial spending either of
their capital, or profits on the bank. Is not this the effect of the
expence of their management? Is not this expence paid in their notes?
But did ever any body imagine that this expence did not diminish the
profits of banking? Consequently, such expence may exhaust these
profits, if carried far enough; and if carried still farther, will
diminish the capital of the banking stock.
As a farther illustration of this principle, let me suppose, an honest
man, intelligent, and capable to undertake a bank. I say that such a
person, without one shilling of stock, may carry on a bank of domestic
circulation, to as good purpose as if he had a million; and his paper
will be every bit as good as that of the bank of England. Every note he
issues, is secured on good private security; that security carries
interest to him, and stands good for the notes he has issued. Suppose
then that after having issued for a million sterling, all the notes
should return upon him in one day. Is it not plain, that they will find,
with the honest banker, the original securities, taken by him at the
time he issued them; and is it not true, that he will have, belonging to
himself, the interest received upon these securities, while his notes
were in circulation, except so far as this interest has been spent in
carrying on the business of his bank? Large bank stocks, therefore,
serve only to establish their credit; to secure the confidence of the
public, who cannot see into their administration; but who willingly
believe, that men who have considerable property pledged in security of
their good faith, will not probably deceive them.
This stock is the more necessary, from the obligation of paying in the
metals. Coin may be wanting, upon some occasions, to men of the greatest
landed property. Is that any reason to suspect their credit? Just so of
banks. The bank of England may be possessed of twenty millions sterling
of good effects, to wit, their capital; and the securities for all the
notes they have issued; and yet that bank might be obliged to stop
payment, upon a sudden demand of a few millions of coin.
Runs upon a bank well established, betray great want of confidence in
the public; and this want of confidence proceeds from the ignorance the
greatest part of men are in, with regard to the state of their affairs,
and of the principles upon which their trade is carried on.
From what has been said, we may conclude, that the solidity of a bank
which lends upon private security, does not so much depend upon the
extent of their original capital, as upon the regulations they observe
in granting credit. In this the public is nearly interested; because the
bank securities are really taken for the public, who are creditors upon
it in virtue of the notes which circulate through their hands.
------------------------------------------------------------------------
CHAP. V.
_Such Banks ought to issue their Notes on private, not mercantile
Credit._
Let me, therefore, reason upon the example of two bankers; one issues
his notes upon the best real or personal security; another gives credit
to merchants and manufacturers, upon the principles of mercantile
credit, which we have explained above; the notes of the one and the
other enter into circulation, and the question comes to be, which are
the best? If we judge by the regularity of the payment of notes on
presentation, perhaps the one are as readily paid as the other. If we
judge by the stock of the two bankers, perhaps they may be equal, both
in value and solidity; but it is not upon either of these circumstances
that the question depends. The notes in circulation may far exceed the
amount of the largest bank stock; and therefore, it is not on the
original stock; but on the securities taken at issuing the notes, that
the solidity of the two currencies is to be estimated. Those secured on
private credit, are as solid as lands and personal estates; they stand
upon the principles of private credit. Those secured on the obligations
of merchants and manufacturers, depending upon the success of their
trade, are good or bad in proportion. Every bankruptcy of one of their
debtors, involves the bank, and carries off either a part of their
profits, or of their stock. Which way, therefore, can the public judge
of the affairs of bankers, except by attending to the nature of the
securities upon which they give credit[7].
Footnote 7:
It must be observed, that in this example, the banker who issues his
notes upon mercantile security, is supposed to grant a permanent loan
to the merchant or manufacturer, as he would do to those who pledge a
personal security. This is totally repugnant to the principle of banks
secured on mercantile credit. Such banks never grant loans for
indefinite duration, upon any security whatsoever. They will not even
discount a bill of exchange, when it has above two months to run.
------------------------------------------------------------------------
CHAP. VI.
_Use of subaltern Bankers and Exchangers._
Here it may be urged, that the great use of banks is to multiply
circulation, and to furnish the industrious with the means of carrying
on their traffic: that if banks insist upon the most solid sureties
before they give credit, the great utility of them must cease; because
merchants and manufacturers are never in a situation to obtain credit
upon such terms.
This argument only proves, that banks are not, alone, sufficient for
carrying on every branch of circulation. A truth which no body will
contravert. But as they are of use in carrying on the great branches of
circulation, it is proper to prevent them from engaging in schemes which
may destroy their credit altogether.
I have observed above, that this method of issuing notes upon private
security, was peculiarly well adapted to countries like Scotland, where
trade and industry are in their infancy.
Merchants and manufacturers there, have constant occasion for money or
credit; and at the same time, they cannot be supposed to have either
real or personal estates to pledge, in order to obtain a loan directly
from the banks, who ought to lend upon no other security.
To remove that difficulty, we find a set of merchants, men of substance,
who obtain from the banks very extensive credits upon the joint real and
personal security of themselves and friends. With this assistance from
the bank, and with money borrowed from private people, repayable on
demand, something below the common rate of interest, they support the
trade of Scotland, by giving credit to the merchants and manufacturers.
To this set of men, therefore, are banks of circulation upon mortgage to
leave that particular branch of business. It is their duty, it is the
interest of the country, and no less that of banks, that they be
supported in so useful a trade; a trade which animates all the commerce
and manufactures of Scotland, and which consequently promotes the
circulation of those very notes upon which the profits of the banks do
arise.
These merchants are settled in all the most considerable towns: they are
well acquainted with the stock, capacity, industry, and integrity of all
the dealers in their district: they are many; and by this are able to go
through all the detail which their business requires; and their profits,
as we shall see presently, are greater than those of banks, who lend at
a stated interest.
The common denomination by which they are called in Scotland, is that of
bankers; but to avoid their being confounded with bankers in England
(whose business is very different) we shall, while we are treating of
the doctrine of banks, call them by the name of exchangers, since their
trade is principally carried on by bills of exchange.
As often as these exchangers give credit to dealers in any way, they
constantly state a commission of ½ _per cent._ or more, according to
circumstances, over and above the interest of their advance; profits
which greatly surpass those of any bank. One thousand pounds credit
given by a bank, may not produce ten pounds in a year for interest: if
given by a banker, to a merchant, who draws it out, and replaces it
forty times in a year, there will arise upon it a commission of 20 _per
cent._ or 200_l._
This set of men are exposed to risks and losses, which they bear without
complaint, because of their great profits; but it implies a detail,
which no bank can descend to.
These exchangers give way, from time to time; and no essential hurt is
thereby occasioned to national credit. The loss falls upon those who
lend to them, or trust them with their money, upon precarious security;
and upon merchants, who lay their account with such risks. In a word,
they are a kind of insurers, and draw premiums in proportion to their
risks.
To this set of men, therefore, it should be left to give credit to
merchants, as the credit they give is purely mercantile; and to banks
alone, who give credit on good private security, it should be left to
conduct the great national circulation, which ought to stand upon the
solid principles of private credit.
From this example we may discover the justness of the distinction I have
made between _private_ and _mercantile_ credit: had I not found it
necessary, I would not have introduced it.
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CHAP. VII.
_Concerning the Obligation to pay in Coin, and the Consequences
thereof._
In all banks of circulation upon mortgage, the obligation in the note is
to pay in coin, upon demand: and in the famous book of Mr. Law, there
was a very necessary clause added; to wit, that the coin was to be of
the same weight, fineness, and denomination, as at the date of the note.
This was done, in order to prevent the inconveniencies which might
result to either party, by an arbitrary raising or sinking the
denominations of the coin; a practice then very familiar in France.
This obligation to pay in coin, owes its origin to the low state of
credit in Europe at the time when banks first began to be introduced;
and it is not likely that any other expedient will soon be fallen upon
to remove the inconveniences which result from it in domestic
circulation, as long as the generality of people consider all money,
except coin, to be false and fictitious.
I have already thrown out abundance of hints, from which it may be
gathered, that coin is not absolutely necessary for carrying on domestic
circulation, and more will be said on that subject, as we go along. But
I am here to examine the nature and consequences of this obligation
contracted by banks, to discharge their notes in the current coin of the
country.
In the first place, it is plain, that no coin is ever (except in very
particular cases) carried to a bank, in order to procure notes. The
greatest part of notes issue from the banks, of which we are treating,
either in consequence of a loan, or of a credit given by the bank, to
such as can give security for them. The loan is made in their own notes;
which are quickly thrown back into circulation by the borrower; who
borrowed, because he had occasion to pay them away. In like manner, when
a credit is given, the bank pays (in her notes) the orders she receives
from the person who has the credit: in this manner are notes commonly
issued from a bank.
Coin, again, comes to a bank, in the common course of circulation, by
payments made to it, either for the interest upon their loans, or when
merchants and landed men throw the payments made to them into the bank,
towards filling up their credits; and by way of a safe deposit for their
money. These payments are made to the bank in the ordinary circulation
of the country. When there is a considerable proportion of coin in
circulation, then the bank receives much coin; and when there is little,
they receive little. Whatever they receive is laid by to answer notes
which are offered for payment; but whenever a draught is made upon them
for the money thrown in as above, they pay in paper.
As we are here searching after principles, not after facts, it is out of
our way to inquire what may be the real proportion of coin preserved by
banks of circulation, for answering the demand for it.
Mr. Megens, a very knowing man, and a very judicious author, lately
dead, who has writ a small treatise in the German tongue, translated
into English, under the title of _The Universal Merchant_, delivers his
sentiments concerning the proportion of coin preserved in the bank of
England, which I shall here transcribe in the translator’s words. Sect.
60.
The bank of England consists of two sorts of creditors, the one of that
set of men, who, in King William’s time, when money was scarce and dear,
lent the public 1,200,000 pounds, at 8 _per cent._ interest, and 4000
pounds were allowed them for charges, amounting in whole to 100,000
pounds a year, an exclusive right of banking as a corporation for 13
years, under the denomination of the proprietors of the bank; and which,
for obtaining prolongation of their privileges, has been since increased
by farther loans to the public at a less interest, to near the sum of
11,000,000 pounds, which if we compute the interest at 3 _per cent._ (as
what they have more on some part answers incident charges) it produces
330,000 pounds a year; and as they divide annually 5 _per cent._ to
their proprietors, which, is 550,000 pounds, it is evident that they
make a yearly profit of 220,000 pounds, _out of the money of the people
who keep cash with them_, and these are the other sort of creditors: and
as for what money the bank lends to the government, they have for the
most part but 3 _per cent._ interest, I conclude that _the credit cash
they have in their hands_ may amount to 11,000,000 pounds, and thereout
is employed in loans to the government, discounting of bills, and in
buying gold and silver 7,333,333⅓ pounds, which at 3 _per cent._
interest or profit, will amount to the above 220,000 pounds, and remains
3,666,666⅔ pounds in cash, sufficient for circulation and current
payments. And experience has evinced, that whenever any mistrust has
occasioned any run upon the bank for any continuance, and the people not
finding the treasure so soon exhausted as they surmised, it flowed in
again faster on the one hand than it was drawn out on the other.
This gentleman lived long in England. He was very intelligent in matters
relating to commerce; and his authority may, I believe, be relied on as
much as on any other, except that of the bank itself; which, it would
appear, has some interest in keeping those affairs a secret.
We see by his account, that the bank of England keeps in coin ⅓ of the
value of all their notes in circulation. With this quantity, business is
carried on with great smoothness, owing to the prosperity of that
kingdom, which seldom owes any considerable balance to other nations.
But the consequence of the obligation to pay in coin, is, that when the
nation comes to owe a balance, the notes which the bank had issued to
support domestic circulation _only_, come upon it for payment of a
foreign balance; and thereby the coin which it had provided for home
demand only, is drawn out.
It is this circumstance, above all others, which distresses banks of
circulation. Were it not for this, the obligation to pay in coin might
easily be discharged; but when in virtue of this pure obligation, a
heavy national balance is demanded of the bank, which has only made
provision for the current and ordinary demand at home, it requires a
little combination to find out, at once, an easy remedy.
This combination we shall, in the following chapters, endeavour to
unfold: it is by far the most intricate, and at the same time the most
important in the whole doctrine of banks of circulation.
Another inconvenience resulting from this obligation to pay in coin, we
have explained in the third book. It is, that the confusion of the
English coin, and the lightness of a great part of it, obliges the bank
of England to purchase the metals at a price far above that which they
can draw back for them after they are coined. We have there shewn the
great profit that might be made in melting down and exporting the heavy
species. This profit turns out a real loss to the bank of England, which
is constantly obliged to provide new coin, in proportion as it is
wanted. This inconvenience is not directly felt by banks, in countries
where there is no mint established.
Here then is another bad consequence of this obligation to pay in the
metals, which a proper regulation of the coin would immediately remove.
In countries which abound in coin, banking is an easy trade, when once
their credit is well established. It is only when either a foreign war,
or a wrong balance of trade has carried off the metals, that the weight
of this obligation to pay in coin is severely felt.
------------------------------------------------------------------------
CHAP. VIII.
_How a wrong Balance of Trade affects Banks of Circulation._
It is commonly said, that when there is a balance due by any nation,
upon the whole of their mercantile transactions with the rest of the
world, such balance must be paid in coin. This we call a wrong balance.
Those who transact the payment of this balance, are those who regulate
the course of exchange; and we may suppose, without the least danger of
being deceived, that the course is always higher than the expence of
procuring and transporting the metals; because the overcharge is profit
to the exchanger, who without that profit could not carry on his
business.
These exchangers, then, must have a command of coin; and where can they
get it so easily, and so readily, as from banks who are bound to pay in
it?
Every merchant who imports foreign commodities, must be supposed to have
value in his hands from the sale of them; but this value must consist in
the money of the country: if that be mostly bank paper, he must give the
bank paper to the exchangers for a bill, whose business it is to place
funds in those parts upon which bills are demanded. The exchanger again
(to support that fund which he exhausts by his draughts) must demand
coin from the banks, for the notes he received from the merchant when he
gave him the foreign bill.
Besides the wrong balances of trade transacted in this manner, which
banks are constantly obliged to make good in coin, every other payment
made to foreigners has the same effect. It is not because it is a
_balance of trade_, but because it is a payment which cannot be made in
paper currency, that a demand is made for coin. Coin we have called the
money of the world, as notes may be called the money of the society. The
first then must be procured when we pay a balance to foreigners; the
last is full as good when we pay among ourselves.
It is proper, however, to observe, that there is a great difference
between the wrong _balance of trade_, and the general _balance of
payments_. The first marks the total loss of the nation when her imports
exceed the value of her exports; the second comprehends three other
articles, viz. 1. the expence of the natives in foreign countries; 2.
the payment of all debts, principal and interest, due to foreigners; 3.
the lending to other nations.
These three I call the general balance of foreign payments: and these
added to the wrong balance of trade may be called the _grand balance_
with the world.
Now as long as the payment of this _grand balance_ is negotiated by
exchangers, all the coin required to make it good, must be at the charge
of banks.
How then is this coin to be procured by nations who have no mines of
their own?
------------------------------------------------------------------------
CHAP. IX.
_How a grand Balance may be paid by Banks, without the assistance of
Coin._
Did all the circulation of a country consist in coin, this _grand
balance_, as we have called it, would be paid out of the coin, to the
diminution of it.
We have said that the acquisition of coin, or of the precious metals,
adds to the intrinsic value of a country, as much as if a portion of
territory were added to it. The truth of this proposition will now soon
appear evident.
We have also said, that the creation of symbolical money, adds no
additional wealth to a country, but only provides a fund of circulation
out of solid property; which enables the proprietors to consume and to
pay proportionally for their consumption: and we have shewn how by this
contrivance trade and industry are made to flourish.
May we not conclude, from these principles, that as nations who have
coin, pay their _grand balance_ out of their coin, to the diminution of
that species of their property, so nations who have melted down their
solid property into symbolical money, must pay their _grand balance_ out
of the symbolical money; that is to say, out of the solid property of
which it is the symbol?
But this solid property cannot be sent abroad; and it is alleged that
nothing but coin can be employed in paying this _grand balance_. To this
I answer, that in such a case the credit of a bank may step in, without
which a nation which runs short of coin, and which comes to owe a _grand
balance_ must quickly be undone.
We have said that while exchangers transact the balance, the whole load
of providing coin lies upon banks. Now the whole solid property melted
down, in their paper, is in their hands; because I consider the
securities given them for their paper, to be the same as the property
itself. Upon this property, there is a yearly interest paid to the bank:
this interest, then, must be engaged by them to foreigners, in lieu of
what is owing to them by the nation; and when once a fund is borrowed
upon it abroad, the rest is easy to the bank. This shall be further
explained as we go along.