I do not pretend that the common operation of providing coin, when the

_grand balance_ is against a nation, is as simple as I have represented

it. I know it is not: and I know also, that I am not in any degree

capable to explain the infinite combination of mercantile operations

necessary to bring it about; but it is no less true, that these

combinations may be shortened: because when the whole of them have been

gone through, the transaction must land in what I have said; to wit,

that either the _grand balance_ must be paid out of the national stock

of coin, or it must be furnished by foreigners upon a loan from them;

the interest of which must be paid out of that part of the solid

property of the nation which has been melted down into paper. I say

farther, that were not all this solid property, so melted down, in the

hands of banks, who thereby have established to themselves an enormous

_mercantile_ credit; there would be no possibility of conducing such an

operation: that is to say, there would be no possibility for nations to

run in debt to nations, upon the security of their respective landed

property.

------------------------------------------------------------------------

CHAP. X.

_Insufficiency of temporary Credits for the Payment of a wrong Balance._

I have said, that when the national stock of coin is not sufficient to

provide banks with the quantity demanded of them, for the payment of the

_grand balance_, that a loan must take place. To this it may be

objected, that a credit is sufficient to procure coin, without having

recourse to a formal loan. The difference I make between a loan and a

credit consists in this, that, by a credit we understand a temporary

advance of money, which the person who gives the credit expects to have

repaid in a short time, with interest for the advance, and commission

for the credit; whereas by a loan we understand the lending of money for

an indefinite time, with interest during non-payment.

Now I say, the credit, in this case, will not answer the purpose of

supplying a deficiency of coin; unless the deficiency has been

accidental, and that a return of coin, from a new favourable _grand

balance_, be quickly expected. The credit will indeed answer the present

exigency; but the moment this credit comes to be replaced, it must be

replaced either by a loan, or by a supply of coin; but, by the

supposition, coin is found to be wanting for paying the _grand balance_;

consequently, nothing but a loan, made by the lenders either in coin, in

the metals, or in a liberty to draw, can remove the inconvenience; and

if recourse be had to credit, instead of the loan, the same difficulty

will recur, whenever that credit comes to be made good by repayment.

Upon the whole, we may conclude, that nations who owe a balance to other

nations, must pay it either with their coin, or with solid property;

consequently, the acquisition of coin is, in this particular, as

advantageous as the acquisition of lands; but when coin is not to be

procured, the transmission of the solid property to foreign creditors is

an operation which banks must undertake; because it is they who are

obliged either to do that, or to pay in coin.

------------------------------------------------------------------------

CHAP. XI.

_Of the Hurt resulting to Banks, when they leave the Payment of a wrong

Balance to Exchangers._

We have seen in a former chapter, how exchangers and banks are mutually

assistant to one another: the exchangers by swelling and supporting

circulation; the bank by supplying them with credit for that purpose.

While parties are united by a common interest, all goes well: but

interest divides, by the same principle that it unites.

No sooner does a nation incur a balance against itself, than exchangers

set themselves to work to make a fortune, by conducting the operation of

paying it. They appear then in the light of political usurers, to a

spendthrift heir who has no guardian. The guardian should be the bank,

who, upon such occasions, (and upon such only) ought to interpose

between the nation and her foreign creditors. This it may do, by

constituting itself at once debtor for the whole balance, and by taking

foreign exchange into its hand, until such time as it shall have

distributed the debt it has contracted for the nation, among those

individuals who really owe it. This operation performed, exchange may be

left to those who make that branch their business, because then they

will find no opportunity of combining either against the interest of the

bank or of individuals.

When a national bank neglects so necessary a duty, as well as so

necessary a precaution, the whole class of exchangers become united by a

common interest against it; and the country is torn to pieces, by the

fruitless attempt it makes to support itself, without the help of the

only expedient that can relieve it.

Those exchangers having the _grand balance_ to transact with other

nations, make use of their credits with the bank, or of its notes, to

draw from it their coin, in order to export it. This throws a great load

upon the bank, which is constantly obliged to provide a sufficient

quantity for answering all demands; for we have laid it down as a

principle, that whatever coin or bills are necessary to pay this _grand

balance_, in every way it can be transacted, it must ultimately be paid

by the bank; because whoever wants coin for any purpose, and has bank

notes, can force the bank to pay in coin, or stop payment.

It cannot, therefore, be said, that exchangers do wrong; nor can they be

blamed, in drawing from the bank whatever is wanted for the purpose of

paying to foreigners what is their due; that is, what is justly owing to

them. If they do more, they must hurt themselves; because whatever is

sent abroad more than is due, must constitute the rest of the world

debtors to the country which sends out their coin. The consequence of

this is to turn exchange against foreigners, and to make it favourable

for the nation which is creditor. In this case, were the creditors still

to continue sending coin abroad, they would _lose_ by that operation,

for the same reason that they _gain_, by sending it out when they are

debtors.

It is very common for banks to complain, when coin is hard to be

procured, and when large demands are made upon them; they then allege

unfair dealings against exchangers; they fall to work to estimate the

balance of trade, and endeavour to show that it is not in reality

against the country.

But alas! this is nothing to the purpose; the _balance of trade_ may be

very favourable, although the _balance of payments_ be greatly against

the country; and both must be paid, while the bank has a shilling of

cash, or a note in circulation. So soon again as the _grand balance_ is

fairly paid off, it is impossible that any one can find an advantage in

drawing coin from a bank; except in the single case of melting down the

heavy species, in nations which give their coinage gratis. Of this we

have treated at sufficient length in another place.

Banks may indeed complain, that men of property are sometimes sending

their money out of the country, at a time when it is already drained of

its coin; that this raises exchange, and hurts the trading interest.

Exchange must rise, no doubt, in proportion as the grand balance is

great, and difficult to be paid: But where does the blame lie? Who ought

to provide the coin, or the bills for paying this grand balance? Have we

not shewn that it is the bank alone who ought to provide coin for the

ready answering of their notes? Have we not said, that the method of

doing this is by sacrificing a part of the interest due upon the

obligations in their hands, secured upon the solid property of the

country, and by the means of foreign loans upon that fund, to procure

either the metals themselves, or a power to draw on those places where

the nation’s creditors reside?

Which of the two has most reason to complain, the bank, because the

inhabitants think fit to send their effects out of the country, being

either forced so to do by their creditors, or choosing so to do for

their private advantage; or the creditors of the bank, and the country

in general, when, from the obstructions the bank throws in the way, when

required to pay its notes, exchange is forced up to an exorbitant

height; the value of what private merchants owe to strangers is raised;

and when, by discouraging trade in their hands, a general stop is put to

manufactures and credit in general?

In a word, the bank has no reason to complain, unless they can make it

appear, how any person, exchanger or other, can find an advantage in

sending coin out of the country, at a time when there is no demand for

it; or when there is no near prospect of it, which is the same thing? To

say that a principle of public spirit should prevent a person from doing

with his property what is most to his advantage, in favour of saving

some money to a bank, is supposing the bank to be the public, instead of

being the servant of the public.

Another argument to prove that no profit can be made by sending out

coin, except when the balance is against a country, is, that we see all

runs upon banks stop, the moment exchange becomes favourable. Were there

a profit to be made upon sending off coin, independently of the debts to

be paid with it, which cannot be paid without it, the same trade would

be profitable at all times. As this is not the case, it follows, that

the principle we have laid down is just; to wit, that the balance due to

foreigners _must_ be paid by banks, while they have a note in

circulation; and when once it is fairly paid by them, all extraordinary

demands _must_ cease.

We now proceed to another point, to wit, What are the consequences to

circulation, when a great balance draws away a large quantity of coin

from the bank, and sends it out of the country?

------------------------------------------------------------------------

CHAP. XII.

_How the Payment of a wrong Balance affects Circulation._

That I may communicate my ideas with the greater precision, I must here

enter into a short detail of some principles, and then reason on a

supposition.

It has been said, that the consequence of credit and paper-money,

secured on solid property, was to augment the mass of the circulating

equivalent, in proportion to the uses found for it.

These uses may be comprehended under two general heads. The first,

payment of what one owes; the second, buying what one has occasion for:

the one and the other may be called by the general term of ready-money

demands.

Whoever has a ready-money demand upon him, and property at the same

time, ought to be furnished with money by banks which lend upon

mortgage.

Now the state of trade, manufactures, modes of living, and the customary

expence of the inhabitants, when taken all together, regulate and

determine what we may call the mass of ready-money demands, that is, of

alienation. To operate this multiplicity of payments, a certain

proportion of money is necessary. This proportion again may increase or

diminish according to circumstances; although the quantity of alienation

should continue the same.

To make this evident, let us suppose the accounts of a whole city kept

by one man; alienation will go on without any payment at all, until

accounts are cleared; and then nothing will be paid, but general

balances upon the whole. This however is only by the bye. The point in

hand is to agree, that a certain sum of money is necessary for carrying

on domestic alienation; that is, for satisfying ready-money demands: let

us call this quantity (A).

Next, in most countries in Europe, (I may say all) it is customary to

circulate coin, which, for many uses, is found fitter than paper, (no

matter for what reason); custom has established it, and with custom even

statesmen must comply.

The paper-money is generally made payable in coin; from custom also.

Now, according to the manners of the country, more or less coin is

required for domestic circulation. Let it be observed, that hitherto we

have not attended to foreign circulation, of which presently: and I say,

that the manners of a country may make more or less coin necessary, for

circulating the same quantity of paper; merchants, for instance,

circulate much paper and little coin; gamesters much coin, and little

paper: one example is sufficient.

Let this quantity of coin, necessary for circulating the paper-money, be

called (B), and let the paper be called (C); consequently (A) will be

equal to the sum of (B) and (C). Again, we have said, that all balances

owing by nation to nation, are paid either in coin, in the metals, or in

bills; and that bank paper can be of no use in such payments. Let the

quantity of the metals, coin, or bills, going out or coming into the

country for payment of such balance, be called (D).

These short designations premised, we may reason with more precision.

(A) is the total mass of money (coin and paper) necessary at home: (A)

is composed of (B) the coin, and of (C) the paper, and (D) stands for

that mass of coin, or metal, or bills, which goes and comes according as

the _grand balance_ is favourable or unfavourable with other nations.

Now, from what has been said, we may determine, that there should at all

times remain in the country, or in the bank, a quantity of coin equal to

(B); and if this be ever found to fall short, the bank does not

discharge its duty. It is unnecessary to determine what part of (B)

should be locked up in the bank, and what part should remain in

circulation: banks themselves cannot determine that question: all we

need to say is, that it is the profit of banks to accustom people to the

use of paper as much as possible; and therefore they will draw to

themselves as much coin as they can.

When a favourable balance of trade brings exchange below par, and brings

coin into the country, the consequence is, either to animate trade and

industry, to augment the mass of payments, to swell (A), and still to

preserve (C) in circulation; or to make (A) regorge, so as to sink the

interest of money below the bank lending price; and then people will

carry back the regorging part of (C) to the bank, and withdraw their

securities; which is consolidating, as we have called it, the property

which had been formerly melted down, for want of this circulating

equivalent (money).

This is constantly the consequence of a stagnation of paper, from an

overcharge of it, thrown into circulation. It returns upon the bank, and

diminishes the mass of their securities, but never that of their coin.

From this we may conclude, that the circulation of a country can only

absorb a determinate quantity of money (coin and paper); and that the

less use they make of coin, the more use they will make of paper, and

_vice versa_.

We may also conclude, that when trade and alienation increase, _cæteris

paribus_, so will money; that is, more solid property will be melted

down; and when trade and alienation diminish, _cæteris paribus_, so will

money; that is, some of the solid property formerly melted down, will

consolidate, as we have called it.

These vicissitudes in the mass of circulation are not peculiar to paper

currency. In countries where nothing circulates but the metals, the case

is the same; only the operation is more aukward and expensive. When coin

becomes scarce there, it is hardly possible, in remote provinces, to

find any credit at all: and in the center of circulation, the use of it

(interest) must rise very considerably, and stand high for some time,

before even intelligent merchants will import bullion to the mint; which

is the only bank they have to fit it for circulation. When the metal is

coined, then men of property are enabled to borrow, or to sell their

lands. On the other hand, when a favourable balance pours in a

superfluity of coin, and at the same time cuts off the demands of trade

for sending it abroad, it frequently falls into coffers; where it

becomes as useless as if it were in the mine; and this clumsy

circulation, as I may call it, prevents it from coming into the hands of

those who would have occasion for it, did they but know where to come at

it. Paper, on the other hand, when banks and trade are well established,

is always to be found. Thus, in an instant, paper-money either creates

or extinguishes an interest equal to its value, in favour of the

possessor. No part of it lies dead, not for a day, when employed in

trade: it is not so of coin.

We must now suppose a bank established in a country which owes a balance

to other nations.

In this case, the bank must possess, or be able to command, a sum of

coin or bills equal to (B) and (D); (B) for domestic, and (D) for

foreign circulation.

Those who owe this balance (D), and who are supposed to have value for

it, in the currency of the country, in order to pay it, must either

exhaust a part of (B), by sending it away, or they must carry a part of

(C) to the bank, to be paid for in coin. If they pick up a part of (B)

in the country, then the coin in circulation, being diminished below its

proportion, the possessors of (C) will come upon the bank for a supply,

in order to make up (B) to its former standard. Banks complain without

reason. If they carry part of (C) to be changed at the bank, for the

payment of (D), they thereby diminish the quantity of (C); consequently

there will be a demand upon the bank for more notes, to support domestic

circulation; because those which have been paid in coin are returned to

the bank, and have diminished the mass of (C); which therefore must be

replaced by a new melting down of solid property.

Now I must here observe, that this recruit, issued to fill up (C) to the

level, is an addition made to the mass of securities formerly lodged

with the bank; and represents, not improperly, that part of the landed

property of a country which the bank must dispose of to foreigners, in

order to procure from them the coin or bills necessary for answering the

demand of (D).

When notes, therefore, are carried to the bank for payment of debts due

to the bank, they then diminish the mass of solid property melted down

in the securities lodged in the bank: but when notes are carried to the

bank, to be converted into coin or bills, for foreign exportation, they

do not diminish the mass of the securities: on the contrary, the

consequence is, to pave the way for the augmentation of them; because I

suppose that the notes, so given in to the bank, and taken out of the

circle, are to be replaced by the bank to domestic circulation, to which

they belonged; and the bank must be at the expence of turning the value

of these additional securities granted for them into coin or foreign

bills.

Is not this quite consistent with reason, fact, and common sense? If a

country contracts debts to foreigners, is it not just the same case as

when one man contracts a debt to another in the same society? Must not

the ultimate consequence of this debt be, that it must be paid, either

with the coin, with the moveables, or with the solid property of the

debtor, transferred to the creditor, in lieu of the money owing?

When a nation can pay with its coin, or with its effects, (that is to

say, with its product and manufactures) the operation is easily and

mechanically performed by the means of trade: when these objects are not

sufficient; or when land, or an annual and perpetual income out of it,

must make up the deficiency; then more skill and expence is required;

and this expence falling upon banks, makes their trade less lucrative

than in times when commerce stands at par, or is bringing in a balance.

Were trade to run constantly against a country, the consequence would

be, that the whole property of it would, by degrees, be transferred to

foreigners. This the bank of St. George at Genoa has operated with

regard to Corsica, as has been observed. But in that case, banks never

could neglect laying down a plan whereby to avoid the loss they casually

sustain, when such a revolution comes suddenly or unexpectedly upon

them.

The method would be, to establish an annual subscription _abroad_, for

borrowing a sum equivalent to the _grand balance_; the condition being

to pay the interest of the subscriptions out of the revenue of the

country.

If the security offered be good, there is no fear but subscribers will

be found, while there is an ounce of gold and silver in Europe.

The bank of England has an expedient of another nature, in what they

call their _circulation_; which is a premium granted to certain persons,

upon an obligation to pay a certain sum of coin upon demand. This is

done with a view to answer upon pressing occasions. But England being a

prosperous trading nation, which seldom has any considerable _grand

balance_ against her, (except in time of war, when the public borrowings

supply in a great measure the deficiency, as shall be afterwards

explained) this bank circulation is turned into a job; the subscriptions

being lucrative, are distributed among the proprietors themselves, who

make no provision for the demand; and were it again to come, (as has

been the case) the subscribers would, as formerly, make a call on the

bank itself, by picking up their notes, and pay their subscriptions with

the bank’s own coin.

To obviate this inconvenience, which was severely felt in the year 1745,

the bank of England should have opened a subscription in some foreign

country; Holland, for example; where she might have procured large

quantities of foreign coin: such a seasonable supply would have proved a

real augmentation of the metals; the supply they got from their own

domestic subscribers was only fictitious[8].

Footnote 8:

At this time there was another circumstance, besides the demand of a

balance to be paid abroad, which distressed the bank, viz. a suspicion

which took place, that if the rebellion had succeeded, the credit of

the bank would have totally failed. This very case points out the

great advantage of banks upon mortgage of private credit.

We have said, that the credit of such banks ought to be established

upon the principles of private securities only. If their notes be

issued upon solid property, then no rebellion can influence them: but

of this more hereafter.

But banks in prosperous trading nations sit down with casual and

temporary inconveniencies; and exchangers carry on a profitable trade,

whether the nation be gaining or losing all the while. For such nations,

and such only, are banks advantageous. Were banks established in Spain,

Portugal, or any other country which pays a constant balance from the

produce of their mines, they would only help on their ruin a little

faster.

In the infancy of banking, and in countries where the true principles of

the trade are not well understood, we find banks taking a general alarm,

whenever a wrong balance of trade occasions a run upon them. This terror

drives them to expedients for supporting their credit, which we are now

to examine, and which we shall find to have a quite contrary tendency.

The better to explain this combination, we must recall to mind, that the

payment of the _grand balance_ in coin or bills is unavoidable to banks.

We have said that this balance is commonly paid by exchangers, who pick

up the coin in circulation; a thing the bank cannot prevent. This we

have called exhausting a part of (B): the consequence of this is, to

make the proprietors of (C) come upon the bank, and demand coin for

filling up (B): to this the bank must also agree. But by these

operations (C) comes to be diminished, below the level necessary for

carrying on trade, industry, and alienation: upon which I have said

there commonly comes an application to the bank to give more credit, in

order to support domestic circulation, which if complied with, more

solid property is consequently melted down.

This swells the mass of securities, and raises (A) to its former level.

But here the bank has an option to refuse more credit: in the former

operations it had none. Now if the bank, from a terror of being drained

of coin, should refuse to issue notes upon new credits, for the demands

of domestic circulation; in this case, I say, they fail in their duty to

the nation, as banks, and hurt their own interest. As to their duty to

the nation, I shall not insist upon it; but I think I can demonstrate

that they fail in point of combination, with respect to their own

interest, and that is enough.

I say, then, that as long as there is one single note in circulation,

and any part of a grand balance owing, that note will come upon the bank

for payment, without a possibility of its avoiding the demand. Refusing

therefore credit, while any notes remain in the hands of the public, is

refusing an interest which may help to make up the past losses: but of

this more hereafter.

In the next place, I think I have demonstrated, that so soon as the

_grand balance_ is paid, it is impossible that any more demands for coin

can come upon the bank for exportation. Why then should a bank do so

signal a prejudice to their country, as to refuse to lend them paper,

which the ready-money demands of the country must suspend in

circulation? And why do this at so great a loss to themselves? It has

been said above, and I think with justice, that this recruit, issued to

fill up circulation, adds to the mass of bank securities, and very

properly represents that part of the income of the solid property of the

country, which the bank must dispose of to foreigners, in order to

procure from them the coin or bills necessary for answering the demand

of payment of a _grand balance_.

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

A bank is forced to pay to the last farthing of this balance; by paying

it, the notes that were necessary for circulation are returned to them;

and they refuse to replace them, for fear that their supplying

circulation should create a new balance against them! This is

voluntarily taking on themselves all the loss of banking, and rejecting

the advantages.

Such management can only be prudent when the circulating notes of a bank

are very few, and when the balance is very great. In that case, indeed,

were the thing possible, it might be prudent to give over banking for a

while, till matters took a favourable turn. But if we suppose their

notes to exceed the balance due, then all the hurt which can be done is

done already; and the more notes are issued, and the more credit is

given, so much the better; because the interest upon all that is issued

above the balance, must be clear profit to the bank.

To bring what has been said within a narrower compass, and to lay it

under our eye at once, let us call the domestic circulation of a

country, where a bank is established, (A).

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

The balances to other nations, (D).

The bank must have a command of credit and coin equal to the sum of (B)

and (D). If they have the value of (D) in any foreign place, where a

general circulation of exchange is carried on; then they have only

occasion for (B) at home, and can furnish bills to the amount of (D).

If (D), in consequence of bills drawn, shall come to be exhausted, the

bank must replace it again, by new contracts, to strangers.

But as soon as (D) is paid, either in coin or in bills, then whatever

coin is drawn from the bank, and sent away by private people,

(exchangers, &c.) must form a balance due to the country; which balance

will render exchange favourable, and will occasion a loss to those who

sent away the coin. In this case, the more credit the bank gives, so

much more will their profits increase.

To conclude: Let banks never complain of those who demand coin of them,

except in the case when it is demanded in order to be melted down, or

for domestic circulation, which may as well be carried on with paper.

And so soon as a demand for coin to pay a foreign balance begins, it is

then both the duty and interest of all good citizens to be as assistant

as possible to banks, by contenting themselves with paper for their own

occasions, and by throwing into the bank all the coin which casually

falls into their hands. As to duty, I shall offer no argument to enforce

it. But I say it becomes a national concern to assist the bank; because

the loss incurred by the bank in procuring coin, falls ultimately on

every individual, by raising exchange; consequently, prices, by raising

the interest of money to be borrowed; and last of all, by constituting a

perpetual interest to be paid to foreigners, out of the revenue of the

solid property of the country. Upon such occasions, a good citizen ought

to blush at pulling out a purse, when his own interest, and that of his

country, should make him satisfied with a pocket book.

------------------------------------------------------------------------

CHAP. XIII.

_Continuation of the same Subject; and of the Principles upon which

Banks ought to borrow Abroad, and give credit at Home._

In every question relative to this subject, we must return to

principles. This is the only sure method of avoiding error. The

intelligent reader, therefore, must excuse short repetitions, and

consider them as a sacrifice he is making to those of slower capacities,

to whom they are useful.

The principle of banking upon mortgage, is to lend and give credit to

those who have property, and a desire to melt it down. This is

calculated for the benefit of trade, and for an encouragement to

industry. If such banks, therefore, borrow, it must be done consistently

with the principles upon which their banking is founded. If the

borrowing should tend to destroy those advantages which their lending

had procured, then the operation is contrary to principles, and abusive.

So much for recapitulation.

While trade flourishes and brings in a balance, banks never have

occasion to borrow; it is then they lend and give credit. This, I

believe, we may take for granted.

When the country where the bank is established begins to owe a balance

to other nations, the bank, as we have seen in the last chapter, is

obliged to pay it in coin or in bills. We have there shewn, that in such

cases it is inconsistent with their principles and interest, to withhold

lending and giving credit, so far as is necessary for keeping up the

fund of circulation to that standard which alienation and ready money

demands require.

To refuse credit, and at the same time to borrow _at home_, must then,

at first sight, appear to be doubly inconsistent. But in order to set

this point in the clearest light I am capable, I shall reason upon a

supposition analogous to the situation of the Scotch banks, and by that

means avoid abstraction as much as I can.

Let me then suppose that Scotland, during the last years of the war

ended in 1763, and ever since (I write in 1764) from the unavoidable

distress of the times, was obliged, 1. to import considerable quantities

of grain in some bad years; 2. to refund the English loans of money

settled there in former times; 3. to furnish some of the inhabitants

with funds, which they thought fit to place in England; 4. to pay the

amount of additional taxes imposed during the war; while, at the same

time, several of the ordinary resources were withdrawn; such as, 1. a

great part of the industrious inhabitants who went to supply the fleets

and armies; 2. the absence of the ordinary contingent of troops; and 3.

the cutting off several beneficial articles of commerce. Let me suppose,

I say, that from a combination of these losses incurred, and advantages

suspended, Scotland has lost annually, for eight years past, two hundred

thousand pounds. I am no competent judge of the exactness of this

estimate, it is of no consequence to the argument; but I think I am far

beyond the true computation.

On the other hand, let me suppose, that the sum of currency in paper,

sufficient (with the little coin there was) to circulate the whole of

the alienations in Scotland, (that is to say, the whole domestic

circulation, supposing no balance to be owing to England or other

countries) to be one million sterling. I am persuaded I am here below

the true estimate, but no matter.

Is it not evident, from this supposition, and from the principles we

have been deducing, that unless the banks of Scotland had alienated

annually in favour of England, a fund for paying the interest of two

hundred thousand pounds capital, and either brought down the coin, or

given bills on London for the sum of that capital every year; that the

million of Scots currency would have been diminished in proportion to

the deficiency; and would not the consequence of that be, _cæteris

paribus_, to bring the currency below the demand for it; and,

consequently, to hurt trade, industry, and alienation?

Now supposing the banks, instead of providing, in England, a fund equal

to this grand balance, (as I have said they should do) to remain in

consternation and inactivity, giving the whole of their attention to the

providing coin and bills to supply the demand of exchangers, whose

business it is to send out this annual balance; what will the

consequence be?

I answer, that if the banks, in such a case, do not follow the plan I

have proposed, the consequence will be, that two hundred thousand pounds

of their paper will be, the first year, taken out of the domestic

circulation of Scotland; will be carried to the bank, and coin demanded

for it. If the coin is found in the bank, it is well; it goes away, and

leaves the paper circulation of Scotland at 800,000_l_. This void must

occasion applications to the bank for credits to supply it. Is it not

then the interest of the bank to supply it? We have said in the former

chapters that it is. But now let us suppose it objected, that if banks

should issue notes at such a time, their cash having been exhausted,

they would be obliged to stop altogether, upon a return of those notes

issued upon additional credits.

To this I repeat again, because of the importance of the subject, that

notes issued to support the demand of circulation never can return upon

the bank, so as to form a demand for coin; and if they do return, it

must be in order to extinguish the securities granted by those who have

credit in bank (I except always that regular demand for coin, at all

times necessary for circulating the paper for domestic uses) and if

those notes return of themselves, without being called in, this

phænomenon would be a proof that circulation is diminishing of itself:

but supposing such a case to happen, it is plain that such return can

produce no call for coin; because when the notes return it is not for

coin, but for acquitting an obligation or mortgage, as has been often

repeated.

Notes are paid in, I say, because circulation has thrown them out. Now

if circulation has thrown them out as superfluous, it never can have

occasion for coin in their stead; because coin answers the same purpose.

But then it is urged that they do not return, because circulation has

thrown them out, but because coin is wanted: be it so. Then we must say,

that circulation is not diminished, as we at first supposed; but that

the return of another year’s balance, makes a new demand for coin

necessary.

Now I ask, how the withholding this 200,000_l._ from circulation, after

the first year’s drain, can prevent the balance from returning? There

are by the supposition still 800,000_l._ of notes in the country; will

not exchangers get hold of two hundred thousand out of _this_ fund, as

well as out of the million? For he who owes, _must pay_, that is, _must

circulate_. It is only the circulation of the industrious, of the rich,

in short _buying_, that is to say, _voluntary circulation_, which is

stopped for want of currency: _paying_, that is, _involuntary

circulation_, never can be stopped; debtors _must_ find money, as long

as there is any in the country, were they to give an acre for a

shilling, or a house for half a crown. Now those who owe this foreign

balance are debtors; consequently, they must draw 200,000_l._ out of

circulation, the second year as the first, whether the standard million

be filled up or not. The withholding, therefore, the credits demanded

upon the first diminution, has not the least effect in preventing the

demand for coin the year following: it only distresses the country,

raising exchange, and the interest of money, by rendring money scarce;

and what is the most absurd of all, it deprives the bank of 10,000_l._ a

year interest, at 5 _per cent._ upon 200,000_l._ which it may issue

anew.

Suppose again, that a second year’s demand for a balance of 200,000_l._

comes upon the bank: if the coin is out, as we may suppose that after

such a drain it will not be in great plenty, expedients must be fallen

upon. In such a case, if the bank does not at once fairly borrow at

London (without any obligation to repay the capital) a sum of

200,000_l._ and pay for it a regular interest, according to the rate of

money, with an obligation to pay, as government does, quarterly[9], on

the change of London, it will be involved in expedients which will

create a monstrous circulation of coin in the bank, perhaps double of

the sum required, and all those operations will land in the end (as to

the bank) in paying the interest of this sum out of the mass of its

securities or stock. If the bank should borrow this 200,000_l._ in

London, in the manner we have said, the circulating fund of coin will be

nowise diminished; there will be no call extraordinary, no rising of

exchange; the bank will have _this_ in its hands; and if it rises, it is

the bank, not the exchangers who will profit by it.

Footnote 9:

Although the interest or dividends on government securities be paid

every half year only, yet by purchasing partly in one fund, and partly

in another; for instance, half in Old South Sea annuities, and half in

New, purchasers may have their interest paid quarterly.

But let us suppose that instead of this, it should have recourse to

temporary credits upon which the capital is constantly demandable, or to

other expedients still less effectual for answering the call which is to

come upon it for the second year’s balance: what will be the

consequence? To this I answer, that those merchants, or others who owe

the balance, will apply to exchangers for bills, for which they must pay

a high exchange: these bills will be bought from the exchangers with

notes, (taken out of circulation) and will reduce this to 600,000_l._

the exchangers will carry these to the bank and demand coin. If the bank

should make use of an optional clause, to pay in six months, with

interest at 5 _per cent._ the exchangers will obtain six months credit

at London, and in consequence of that, their bills will be honoured and

paid. This credit costs them money, which is added to the exchange: the

bank, at the end of six months, pays in coin, which in the interval it

must provide from London. It pays also six months interest upon the

paper formerly presented by the exchanger: add to the account, that

bringing down the coin must cost the bank at least 12 shillings _per_

hundred pounds, and as much more to the exchanger who receives it in

order to send it back again; and after all these intricate operations

which have cost so much trouble, ill blood, stagnation and diminution of

circulation, expence in exchange to the debtors of the balance, stress

of credit upon exchangers for procuring so large advances with

commission, &c. expence to the bank in providing coin, expence to the

exchangers in returning it; after all, I say, the operation lands in

this: that 200,000_l._ of notes, taken out of the circulation of

Scotland, returns to the bank who must have provided, at last, either

coin, or credit at London for them. This return of 200,000_l._ of notes

does not diminish the mass of those obligations lodged in the bank, in

virtue of which they are creditors upon the proprietors of Scotland:

consequently, the bank has constituted itself debtor to England for

those funds which have been _torn from it_ in the manner above

described: consequently, had it, by a permanent loan, constituted itself

voluntarily debtor to England from the beginning, it would have paid no

more, nay less than it has been obliged to pay; circulation would not

have lost 200,000_l._ and the bank would have had the interest of

200,000_l._ added to its former securities, which would compensate (_pro

tanto_ at least) the expence of borrowing that sum in England upon a

permanent fund. Instead of which it compensates the interest of a

temporary loan, with the same sum of interest taken out of the

securities in its hand. If, therefore, from an ill grounded fear of

issuing as much paper as is demanded, it shall withhold it, there

results to itself a loss equal to the interest of what it refuses to

lend; that is to say, there is a _lucrum cessans_ to the bank of the

interest of this 200,000_l._ at 5 _per cent._ or at 10,000_l._ a year;

which other banking companies will fill up, and thereby extend their

circulation.

If, besides refusing credits, it should call in any part of those

already given, it still diminishes circulation: but then by that

operation it diminishes the mass of its securities, and so diminishes

the sum of the interest annually paid to itself. If it goes farther and

borrows money at home, such loans will be made in its own paper, which

will diminish farther the mass of circulation; and if it goes on

recalling the credits and mortgages, it will soon draw every bit of its

paper out of circulation, and remain creditor upon Scotland only for the

balance it has paid to England on her account. Such are the

consequences, when a bank which lends upon private security withholds

credit, at a time when a national balance is due, and when applications

are made to it for new credits, to fill up the void of circulation

occasioned by the operations used for the payment of the balance: such

also are the additional fatal consequences, when to this it adds so

inconsistent an operation as that of borrowing in its own notes, or

recalling the credits it had formerly given.

By the first step it only appears passive in allowing natural causes to

destroy both the bank and the nation, as I think has been proved.

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

What benefit can ever a bank which lends upon private security reap by

borrowing within the country of which it is the center of circulation;

nay, what benefit can it ever reap from withholding its notes from those

who can give good security for them!

Every penny it borrows, or calls in, circumscribes its own profits,

while it distresses the country. After all the combinations I have been

able to make, I can discover but one motive which (through a false

light) may engage a bank to this step, to wit, jealousy of other banks.

As this speculation is designed to illustrate the principles of

circulation, from circumstances relative to the present state of the

Scotch banks, let us call things by their names.

The banks of Edinburgh resemble, more than any other in Scotland, a

national bank. Let me then suppose all that can be supposed, viz. that

the abundance of their paper has given occasion to lesser banks to pick

up from _them_ every shilling of coin which these lesser banks have ever

had; and that these have had the address also to throw the whole load of

the balance upon those of Edinburgh: let this be supposed, more cannot,

and let us allow farther, that this must ever continue to be the case.

In these circumstances, what motive can the banks of Edinburgh have for

withholding credit from those who are able to give security? What motive

can they have for borrowing up their own notes?

Indeed I can account for this plan of management in no other way than by

supposing, that disgusted at the long continuance of an unfavourable

balance of trade against their country, and vexed to find the whole load

of it thrown upon themselves, they have taken the resolution to abandon

the trade, and are taking this method of recalling their paper

altogether.

Let me suppose the contrary, and I shall not be able to discover how it

is possible that such a conduct can turn to their own advantage,

throwing out all consideration of the public good, which for some time,

no doubt, must be greatly hurt by it.

As long as any considerable quantity of their notes is in circulation,

and that the principal exchangers reside at Edinburgh, they never can

avoid the loss of paying the balance; and by refusing to fill up the

void occasioned by the return of their notes, they deliver the whole

profit of replacing them to the other banks, their rivals.

Let me next estimate the losses they sustain by furnishing coin to the

other banks, and for the payment of the balance; and then compare these

with what they lose by not keeping circulation full.

I shall suppose the balance to cost them two hundred thousand pounds

_per annum_; and I shall suppose that all the lesser banks put together

have occasion for two hundred thousand pounds in their chests: Is not

this computation far above what can possibly be supposed?

Will it be allowed that if the banks of Edinburgh willingly submit to

pay the whole of the bills of exchange demanded on London, for this

balance, they will have at least the preference in replacing that sum to

circulation?

If they pay the balance of 200,000_l._ a like sum of their notes must

come in to them, without diminishing one shilling of the interest paid

upon the securities lodged in their banks; consequently, the only loss

incurred is the difference between the interest they receive, which is 5

_per cent._ and what it would cost them to borrow a like sum in London,

and to remit the interest of that sum four times a year.

Now the value of a 4 _per cent._ is at present about 96; so in paying

20_s._ _per_ quarter on the change of London, the Edinburgh banks may

have at London a capital of 96_l._ Let me call it only 94_l._ supposing

their credit not to be quite so good as that of the funds. I think it as

good to the full; and I am sure it is so. At this rate, the 200,000_l._

will cost them an interest of 8510_l._ instead of the 10,000_l._ which

they will receive for the like sum added to their former securities. Now

I suppose that they have recourse to exchangers to remit this interest,

and that they pay for it 5 _per cent._ (which is an absurd supposition,

as they will have the exchange entirely in their own hands) and that

they give all the bills for the 200,000_l._ at par, (also a ridiculous

supposition) the 5 _per cent._ on 8510_l._ is 425_l._ 10_s._ which added

to the interest, makes 8935_l._ 10_s._ so that after all, they will have

upon the whole transaction 1064_l._ 10_s._ of profit.

Next, as to the loss incurred in furnishing 200,000_l._ to the other

banks: If this coin be demanded of them by those banks, the demanders

must, for this purpose, draw 200,000_l._ of Edinburgh notes out of the

circulation of Scotland; which I have supposed may be replaced in some

little time by the Edinburgh-banks; consequently, if this sum also be

borrowed at London, there will result upon this operation, as well as

upon the last, a profit of 1064_l._ 10_s._ But then indeed they must be

at the expence of bringing down the coin borrowed, at 12_s._ _per_

100_l._ because those banks will insist upon having coin, and refuse

bills on London. This will cost 1200_l._ from which deduct the profit of

1064_l._ 10_s._ gained by the first operation, remains of loss upon this

last transaction 135_l._ 10_s._ no great sum[10]. Does it not follow

from this reasoning, that the banks of Edinburgh will have the whole

business of exchange in their own hands? What exchanger then will enter

into competition with them? The domestic transactions with the merchants

and manufacturers of Scotland will be their only business. Farther,

Footnote 10:

We are not to suppose that this yearly balance of 200,000_l._ is

always to continue. We have seen how it has been occasioned by a

course of unfavourable circumstances, which have run Scotland in debt;

we have seen how the banks may interpose their credit, in order to

assist the country in paying it; and we shall see, before we dismiss

this subject, how they will be enabled to repay it, and set Scotland

free, by a return of a favourable balance upon their commerce. Let it

then be remembred, that all those contractions in England are properly

the debts of Scotland, not of the banks. Scotland, therefore, and not

the banks, must be at all the expence thereby incurred. These points

shall be explained as we go along.

What prevents the banks of Edinburgh to have offices in every trading

town in Scotland, where their notes may be regularly paid on

presentation, and new credits given as circulation demands them?

The only objection I can find to this plan of banking, is the difficulty

of finding credit at London to borrow such large sums.

This, I think, may also be removed, from the plain principles of credit.

If the banks of Edinburgh enter into a fair coalition, as they ought to

do, I think, in order to form really a national bank, totally

independent of that of England; may they not open a subscription at

London, and establish a regular fund of their own, as well as any other

company, such as the India, or South Sea? By borrowing in the beginning

at a small advance of interest above the funds, and paying as regularly

as government does, will not all those who make a trade of buying and

selling stock fill their loan, rather than invest it in any other

carrying a less interest? And if the whole land securities, and stocks

of those banks at Edinburgh be pledged for this loan, will it not stand

on as good a bottom as any fund upon earth? And can it be doubted but

parliament will encourage such a scheme, upon laying the affairs of

Scotland and the banks properly before them?

By this means they will really become a national bank: because England

seems at present to be to Scotland, what all the rest of the world is to

England. Now, the bank of England has no such fund of credit on the

continent, that I know; and were that country to fall into as great

distress, by a heavy balance, as Scotland has been, she would find as

many difficulties in extricating herself by domestic borrowings, bank

circulation, &c. as Scotland has found by the like domestic expedients.

She would then be obliged, for her relief, to have recourse to a fund

opened in Holland, Spain, or Portugal, like to what I propose for

Scotland with respect to England.

I have heard it alledged, that the whole distress occasioned to the

banks and circulation of Scotland, was occasioned by a false step taken

by them, some years ago; at the time when the lowness of the English

funds, and a prospect of a peace, occasioned great remittances from

Scotland, and a withdrawing of the large capital of, perhaps, 500,000

_l._ owing in Scotland to English persons of property.

At that time, it is said, the banks imprudently launched out in giving

extensive credits to the debtors of those capitals, and to those who

wanted to remit the funds they had secured in the hands of people who

could not pay them; that this threw a load of paper into circulation,

which it could not suspend, being far beyond the extent of it; and that,

consequently, the paper came back upon the bank, produced a run for

coin, which soon exhausted, in a manner, all that was in Scotland; and

that the country has never been able to recover itself since.

This representation is plausible, and has an air of being founded on

principles: in order therefore to serve as a further illustration of the

subject of circulation, I shall point out where the fallacy lies.

It is said the banks did wrong in giving those credits. I say, they did

right; but they did wrong in not providing against the consequences.

Had they refused the credits, the English and other creditors would have

fallen directly upon their debtors, and obliged them to pay, by a sale

of their lands, at an under value; which, I think, would have been an

infinite loss to Scotland. In this way the price would have been paid in

bank paper, taken out of circulation; for we have said, that _he who

owes must pay_, be the consequence what it will. This paper would have

come upon the banks at any rate; and being a balance due to strangers,

must have been paid by the banks. The banks therefore did right to

supply the credits demanded; but then they might have foreseen that the

whole load of paying those debts would fall upon them; which they being

in no capacity to do, should have immediately pledged in England, the

interest of the credits they had given out, after supplying the want of

Scots circulation, and when the notes came in, they would have had at

London the capital of that interest prepared for paying them off, and no

inconvenience would have been found.

The only thing then the bank seem to have misjudged, was the granting

those credits too hastily, and to people who perhaps would not have

invested their funds in England, had it not been from their facility in

giving credit.

Banks therefore should well examine the state of circulation, and of the

grand balance, in difficult times, before they give credit. If

circulation be full, they may, with justice, suspect that the credits

are demanded with a view of expediency, to transport property out of the

country, which otherwise might have remained. But in favour of

circulation, or in favour of what might be exacted by foreign creditors,

banks never can misjudge in giving credit; because, if they should

refuse to do it, they in the first place incur a loss themselves; and in

the second place, they diminish the fund of circulation, and thereby

hurt the country. Now when, at such times, a credit is asked or given,

that demand is a warning to banks to prepare; and by preparing they are

ready, and no loss is incurred.

Upon the whole, it is an unspeakable advantage to a nation to have her

foreign debts paid by her bank, rather than to remain exposed to the

demands of private foreign creditors; because, when a bank pays them, I

suppose her to do it upon a loan in the funding way, where the capital

is not demandable by the creditor; whereas when private citizens are

debtors to strangers, the capitals are always demandable; and when a

call comes suddenly and unexpectedly, the country is distressed. What

would become of Great Britain, if all her debts to strangers were

demandable at any time? It is the individuals who owe, in effect, all

that is due to foreigners; because they pay the interest: but they pay

this interest to the public; and the public appears as the debtor to all

strangers, who have no right to exact the capital, although the state

may set itself free whenever it is convenient.

I have said above, that after all the combinations I had been able to

form, I could discover but one motive to induce a bank to withhold

credit at a time when it was demanded for the use of domestic

circulation, viz. jealousy of other banks. What my combinations could

not then discover, my inquiries have since unfolded.

It is said, that the banks finding so great a propensity in the

inhabitants of Scotland to consume foreign manufactures and produce,

fell upon this expediency of calling in the old, and of refusing new

credits, in order to cut off such branches of hurtful luxury and

expence.

Could the execution of such a plan prove a remedy against the vice

complained of, this circumstance alone would more clearly demonstrate

the utility of banks upon mortgage, than all I have been able to say in

favour of that establishment.

Let us therefore have recourse to our principles, in order to discover

what influence a bank can have in this particular.

We have distinguished between _necessary_ and _voluntary_ circulation:

the _necessary_ has the _payment of debts_; the _voluntary_ has buying

for its object.

We have said that he who owes is either a bankrupt, or _must pay_, as

long as there is a shilling in the country.

But he who buys, or inclines to buy, _must have money_, or he can buy

nothing; for if he buys on credit, he then falls immediately into the

former category, and _must pay_.

By withholding money for the uses of circulation, which banks may do for

some time, buying _may_ be stopped; paying _never can_.

Now if the mass of money in circulation is brought so low, that the

_higher_ classes of the people, who consume foreign productions, cannot

find money to buy with, what are we to suppose will be the case with

manufacturers, and with the merchants who buy up _their_ work? Could

this operation of the bank affect the _higher classes_ only, by curbing

their anti-patriot expences, without affecting the _lower classes_, by

curbing their industry, I should think it an admirable discovery. If it

even could be made to affect those merchants and shop-keepers only, who

deal in foreign commodities, so as to discourage them from carrying on

that business, there would result from it a notable advantage.

But alas! wherein are they hurt? They trade in such commodities, not

because they are bad citizens, but because they are freemen, and seek

profit wherever the laws permit.

Perhaps, they find more difficulty than other people in forcing coin

from the bank, as matters stand: perhaps, they are loaded with

opprobrious appellations for extorting such payments from the bank:

perhaps, their credits with the bank are recalled. But must not those

who buy from them, pay them? And must not the bank give coin, or bills,

for the notes they receive, when presented for payment? Why, therefore,

throw difficulties in the way? All the world knows, that no human engine

can prevent a merchant from laying all the expences of his trade upon

the consumer. Correct the taste of the consumers, and you may stop the

trade: no other restraint will be of any consequence. But in order to

correct the taste of consumers, do not deprive them absolutely of money;

because the money the landlord receives, comes from the farmer, for the

price of his grain, &c. Would it be a good scheme for preventing

soldiers from drinking brandy, to cut off their subsistence-money? Give

a drunkard but a penny a day, it will go for liquor; and those who are

fond of foreign clothing, will take the price of it from their bellies,

to put it on their backs.

If this scheme of the bank’s withholding credit, proves, at present, any

check to those dealers in English goods, it will be but for a very short

time. They have been taken by surprize; and, perhaps, thrown into

inconveniencies from an unexpected change of bank management; but as

long as there is a demand for such commodities, there will be a supply;

and when people owe, they _must pay_. No operation of a bank can prevent

this.

I must, therefore, according to principles, disapprove of this

public-spirited attempt in the banks of Edinburgh; because, if it should

succeed, it will have the effect of ruining all the trade and industry

of Scotland, in order to prevent the sale of English goods: and if it

does not succeed, which is more than probable, from the assiduity of

other banks in supplying credit, it will have the effect of ruining the

banks of Edinburgh themselves.

This step, of calling in the bank credits, and opening a subscription

for a loan, is represented by others in a light somewhat different.

By these it is alledged, that in the beginning of the year 1762, when

the Edinburgh banks withdrew ¼ of all their cash accompts, and opened a

subscription for borrowing-in their own notes, at an interest of 4, and

even 5 _per cent._ the demand for money, to send to England, was not

occasioned by the great balance owing by Scotland, but to the high

premium money then bore at London; because, says the author of a letter

to J... F...... Esq; published at that time,

“This demand arises from a profit on carrying money to London, _as a

commodity_, and not as a balance of trade.”

It is not easy to comprehend how there could be much profit in carrying

money to London at 3 _per cent._ loss by exchange, from Scotland, where

it bore 5 _per cent._ interest.

It is true, that at certain times, there were considerable profits made

upon stock-jobbing; by which some won, and others were ruined. I agree,

that the country was greatly hurt by the folly of those who played away

their own property, and by the roguery of others, who borrowed that of

their neighbours, with an intention of gaming at their risk. But is this

a vice which any bank can correct, while it has a note in circulation?

If, therefore, it was a sentiment of patriotism which moved the banks to

such a plan of conduct, I say they thereby did more hurt to industry, by

contracting circulation, than good to Scotland, by attempting a thing

which was beyond their power to accomplish.

If they were moved to it by a principle of self preservation, I say they

lost their aim, by cutting off their own profits, which would have done

much more than indemnify them for the loss of borrowing at London, at

the time when money there was hardest to be got: for whatever exorbitant

expence of exchange gamesters may incur, to procure ready money to play

with, the rate of the stocks at that time never was so low, as to afford

a profit upon money remitted at 3 _per cent._ loss by exchange, while

that money was bearing 5 _per cent._ interest at home.

The lowest rate of stocks was in January 1762. Towards the end of that

month 3 _per cents._ fell to 63¼: this makes the value of money to be

about 4_l_. 12_s._ _per cent._ In these funds, certainly, no body could

invest, with profit, money sent from Scotland.

After the new subscription had been open for some time, scrip indeed, or

4 _per cent._ fell in this month so low as 74½, that is, money rose to

5.4 _per cent._ whereas had scrip stood at the proportion of the 3 _per

cents._ it should have been worth about 84: but at the beginning of a

war with Spain, when the minds of men were depressed, and filled with

apprehensions, and when a new loan was perhaps expected at a higher

interest than ever government had given, was it natural for people to be

fond of investing in a 4 _per cent._ stock, which was to fall to 3 _per

cent._ in a few years?

Besides, let us examine the profit to be made by investing even in that

fund. 100_l._ produced in Scotland 5_l._ interest, that capital remitted

to London at 3 _per cent._ exchange, was reduced to 97_l._: now if

74.5_l._ produced 4_l._ the produce of 97_l._ would be about 5_l._ 4_s._

Would any man for the sake of ⅕ _per cent._ advance of interest on money

remitted, ever think of sending large sums to London to be invested in a

falling stock?

I allow that, upon opening subscriptions, great profit was sometimes

made by those who contracted with government, and who received the

subscriptions at prime cost. But this profit depended entirely upon the

subsequent rise of the subscription, when the original subscribers

brought it first to market; as also from the small sums they had

advanced: this operation was over before the end of January 1762. The

smalness of the sum advanced, upon which the profit was made, and the

ministerial interest which was necessary to obtain a share in those

subscriptions, rendred it extremely difficult for people in Scotland to

share in the profit by remitting large sums in the proper point of time.

Farther, might not the banks, in the short period during which such

large profits were made, had they had the exchange in their hands, have

raised it so high as to frustrate the attempts of our Scots gamesters?

If it be said, that exchangers would have disappointed them, by giving

it lower; I answer in the negative: because to that set of men exchange

will rise, of itself, in proportion to the value of money _in the place

to which people incline to remit it_. And could money at any time bring

in, at London, 20 _per cent._ interest, exchange upon that place would

rise universally in proportion.

The only motive, not already mentioned, for sending money to London at

this time, under so great disadvantages, was the prospect of a great

rise upon the stocks, in the event of a peace. Upon which I observe,

that the value of that probability was included in the then price of

stock; and had the probability of a peace, in January 1762, been great,

stocks would have risen in proportion: he, therefore, who vested his

money in stock, by remitting from Scotland at that time, upon an

expectation peculiar to himself, I consider as a gamester, and as an

ignorant gamester too; because he was giving odds upon an equal bett.

This every man does, who, without any prospect of a profit peculiar to

himself, pays a high exchange to bring money to a market, where he buys

at the same price with those who pay no exchange at all.

From these considerations, I am led to differ from the ingenious author

of the letter to J. F. Esq; who says, “That in the present case” (the

circumstances operating in January 1762,) “the demand” (for money to

remit to London) “is unlimited, and no provision the banks can make can

be of use; on the contrary, could they find a treasure, suppose of a

million, it would only serve to increase it; because this demand arises

on a profit on carrying money to London as a commodity, and not as the

balance of trade.”

------------------------------------------------------------------------

CHAP. XIV.

_Of optional Clauses contained in Bank Notes._

As we are examining the principles upon which banks of circulation upon

mortgage, which issue notes payable in coin, are established in

Scotland, it is proper to take notice of every circumstance which may

arise from the extensive combination of the interests of trade and

circulation, especially when we find such circumstances influencing the

political welfare of society.

An optional clause in a bank note is added to prevent a sudden run upon

banks, at a time when more coin may be demanded of them than they are in

a capacity to pay.

Banks not regulated by statute, are private conventions, in which the

parties may include what conditions they think fit. Banks, therefore,

may insert in their notes, the conditions they judge most for their own

advantage. Thus, they may either promise peremptory payment in coin upon

demand, or they may put in an alternative, that in case they do not

choose to pay in coin, they may pay in bills, or in transfer of their

stock, or in other circulating paper not their own; or they may

stipulate a certain space of time after the demand, with interest during

the delay. All these alternatives are inserted, in order to avoid the

inconvenience of running short of coin, and of being obliged to stop

payment altogether.

We have said above, that the profits of banks consist in their enjoying

the same interest for the notes they lend, as if the loan had been made

in gold or silver. This is a very great object, no doubt; but the policy

of nations has established it, and therefore we shall suppose it to be

an uncontroverted principle.

In which ever way, therefore, an optional clause is inserted, it should

be such as to cut off all profit from the bank, upon all paper presented

for payment, from the time of presentation; and every artifice used to

suspend the liquidation of the paper, to the advantage of the bank, and

prejudice of the bearer, should be considered as unfair dealing in the

bank, and prohibited by law.

When the optional clause has no tendency to procure advantage to the

bank, in prejudice of the holder of the paper (except so far as the

holder is thereby deprived of the use of coin, which on certain

occasions cannot be supplied by the paper) it becomes the duty of a

statesman to examine how far it is expedient to suffer such stipulations

to be inserted, in a money which is calculated to carry on the

mercantile interest of the nation.

Banks, we have said, are the servants of the public, and they are well

paid for their services. Although the notes issued by them are not

commonly made a legal tender in payment; yet the consequence of a well

established bank, is to render them so essential to circulation, that

what is not a legal obligation becomes one, _in fact_, from the force of

custom.

Let us therefore examine the advantages which result to banks from this

optional clause, and the loss which results to a nation from their use

of it, and then compare the advantages with the inconveniencies, in

order to determine whether or not it is expedient to permit such

obstructions in the circulation of paper.

The advantages which banks reap is confined to that of gaining time, at

the expence of paying interest. The interest paid by them is an aukward

operation. They receive interest for the note; because they have in

their possession the original security given for the notes when they

were first issued; and they begin to refund this interest to the holder

of the note from the time they make use of the optional clause. Could

the banks, therefore, borrow coin in a moment, and pay the same interest

for the coin which they pay to the holder of the note, they would

certainly never make use of this optional clause. But this coin is not

to be found in a moment; and the banks, to save themselves the trouble,

and the expence of augmenting the fund of coin, or of procuring a fund

out of another country, upon which they might draw for the payment of

that national balance, which, by becoming banks, they tacitly engage to

pay for the nation, render the credit of individuals precarious with

strangers, and raise a general distrust of the whole society which they

ought to serve. Here then is a very great loss resulting to a nation

from the establishment of banks. Were no bank established, no merchant

would contract a debt to strangers, without foreseeing the ready means

of discharging it with the coin circulating in the country. In

proportion as this coin came to diminish, so would foreign contractions

of debt diminish also. Thus _credit_, at least, might be kept up,

although trade might be circumscribed, and manufactures be discouraged.

Now when, in order to advance trade and encourage manufactures, a

statesman lends his hand towards the melting down of solid property, and

countenances banks so far as to leave that operation to them, with the

emolument of receiving interest for all their paper; and when, in order

to facilitate the circulation of this paper, the very inhabitants concur

in throwing all their specie into a bank, is it reasonable to indulge

banks so far as to allow them to add an optional clause, which

disappoints the whole scheme, which stops trade, ruins manufactures,

raises the interest of money, and renders the operation of melting down

property quite ineffectual for the purposes which it was intended to

answer? Farther,

The loss a bank may be at, in providing coin, is susceptible of

estimation, let it be brought from ever so distant a country; because we

know that the quantity to be provided, never can exceed the value of the

_grand balance_. But who can estimate the loss a nation sustains, when

an interruption is put to carrying on trade and manufactures? When the

industrious classes of inhabitants are forced to be idle for a short

time, the consequences are hardly to be repaired: they starve, they

desert; the spirit of industry is extinguished; in short, all goes to

ruin.

Besides, when banks do not lay down a well digested plan for paying

regularly, and without complaining, this _grand balance_ due to

strangers, they are forced to have recourse to expedients for preserving

their credit, more burdensome, perhaps, than what is required of them;

and not near so effectual for removing the inconveniences complained of.

The expedients they fall upon to obtain credit, coin, and bills, are so

various, and so complicated, that they alone are able to explain them.

Sometimes we see them entring into contracts with private merchants and

exchangers, (_living among themselves!_) who engage for a certain

premium to furnish coin as it is demanded. The consequence of this, is,

to expose the bank to a new demand for coin, from the very contractors,

in order to fulfil their engagements; an abuse we have taken notice of

above in speaking of the _bank circulation_ of England.

Let us suppose that these undertakers for coin do really set out by

doing _in part_ what banks should _effectually_ do themselves, that is,

by bringing from another nation, the coin which they are to supply. What

is the consequence? The banks pay the undertaker for this coin in their

own notes. Did they only engage to pay a certain interest for the coin

so provided, then the end would be accomplished, with the additional

expence to them of paying the undertaker for his expence, trouble, and

profit. But if they, instead of paying interest for the coin so

furnished, shall issue their notes for the full value of it, such notes

can never enter into domestic circulation, so as to be suspended in it

as it were; because it is not domestic circulation which has demanded

them: they must then return upon the bank, either from the very hand who

received them, or at least, after a short circulation; and thus draw out

again the whole coin furnished by the undertaker. This produces a

prodigious circulation of coin, and induces people to imagine that

either the _grand balance_ is inexhaustible, or that the premium upon

money at London is very high, or that people can contrive a fictitious

balance, as a means of profiting upon coin, after the balance has been

actually paid[11].

Footnote 11:

The directors of the bank of England have had recourse to a like

expedient with as little success. They used, during the war, to buy

up, with their paper, the coin brought in by privateers; and after

they had been at this trouble, the notes they had given for it

returned upon them, and drew it out again.

This method of providing coin is absolutely delusive, and opens a door

to infinite abuse. Those who furnish the coin to the bank, are either in

the combination against the bank, and draw it out as fast as they throw

it in; or they are not in the combination: if they are in the

combination, they profit by it; if they are not, they are hurt by their

contract, and other exchangers draw the advantage; but the bank is

equally a loser in both cases.

Let me suppose that they are not in the combination, and that they

honestly procure the coin at their own expence. If they are paid in

notes for the coin they furnish, we must suppose that the coin they have

procured, is not in consequence of a loan, but of a _credit_ given them

in the place from which the coin is sent: for I never can suppose that

any merchant will borrow coin upon a _loan_, and lie out of so large a

capital while he has bank notes in his hand to pay up what he has

received. If he has procured this coin upon _credit_, will not this,

when it comes to be replaced, augment the grand balance against the

nation in favour of the country or city which granted that credit? And

must not that balance be paid by exchangers out of the coin received by

the bank? If, therefore, we suppose that the undertaker does not draw

out the very coin he had just delivered into the bank, will not

exchangers do it for him; will not they be ready with notes, as soon as

the coin is lodged in the bank, to draw it out, and send it off, in

order to furnish the undertaker with bills to fill up his credit, for

the coin he had received from people residing in the place to which the

exchangers have sent coin, to be ready to answer their draughts? Does

this differ in the least from what is called drawing and redrawing,

which is sufficient to ruin any man, and must not a like practice ruin a

bank, by raising exchange to a monstrous height?

This being the case, the shortest and the best method of preventing such

abuses, is to oblige banks to pay upon demand, in coin or bills, at the

option of the holder of the note. This will force them into the method

of providing them; to wit, fairly borrowing money from nations to whom

we owe, and paying a regular interest for it, without an obligation to

refund the capital, until the grand balance shall take a favourable

turn; in which case, the banks will regorge with coin drawn from

strangers, and these strangers will then find as great an interest in

being repaid, as the bank found in borrowing from _them_, while the

balance was in _their_ favour.

We have said, that a statesman should oblige all public banks to pay

regularly upon demand, in coin or bills, at the option of the holder of

the note. But then he must facilitate to them the means which he has in

his power, of providing themselves with the coin, or bills demanded.

For that purpose, he must, first, provide them with a mint, for how,

without a mint, can a bank convert into coin the metals it may provide

from other countries? Next, he must put that mint under such regulations

as to cut off all profit from money-jobbers, who will be ready to draw

coin out of the bank the moment they find the least advantage in

tampering with it. In order to prevent this abuse, a reasonable rate of

coinage should be imposed, according to the principles laid down in the

third book; and when banks have occasion to pay a balance out of the

nation’s coin, a drawback for part of the coinage should be given them.

This drawback will support the value of the coin, and the loss of the

remainder will engage them to export bullion preferably to coin, when it

is to be found: and if no drawback were given, the coinage would be

totally lost to the bank.

When this deduction is given, the coin must be melted down, and stamped

in bars at the mint; both in order to prevent frauds in the drawbacks,

and to disappoint strangers who receive it at the price of bullion, from

gaining the price of coinage when they return it back. And in the last

place, all light coin should be banished out of circulation, and made to

pass by weight for bullion, at the current price of the market. All

banks should both receive and deliver coin by weight, when the sums are

so considerable as to require full bags of coin to pay them. It is not

here necessary to repeat what has been said upon this subject at so much

length in another place.

The method of facilitating to banks the means of providing bills for the

payment of foreign balances, is, secondly, to assist them in procuring

loans beyond the district of their own circulation. If government shall

be satisfied that the intention of demanding such loans, is to enable

the bank to interpose their credit in favour of the trade and industry

of those who circulate their paper, and who have no way of paying such

balances, but with their solid property; in that case, government will,

undoubtedly, assist the bank in obtaining loans for so national a

purpose, by declaring the security upon which they desire the loan to be

good, and by becoming answerable to the public for the solidity of it.

------------------------------------------------------------------------

CHAP. XV.

_Of subaltern Banks of Circulation, and of their Competition with one

another._

We have hitherto treated of the principles which influence national

banks of circulation, we now come to examine some peculiarities

attending banks of a subaltern nature, which for the most part trust to

the national bank for all supplies of coin; and when this resource fails

them, they are thereby involved in difficulties which are not easily got

the better of. Besides this inconvenience, to which all subaltern banks

are subject, they are frequently exposed to competition with one

another.

A national bank enjoys such great advantages from the stability of its

credit, and the regularity of its operations, that it is not easy for

any other private company to establish themselves upon the same solid

system.

When any banking company is established, which draws its support from a

national bank, the facility of carrying on the business by so great an

assistance, naturally engages other companies to imitate their example.

From thence arises a competition. All such banks begin to consider the

circulation of their own district as their undoubted property, and they

look with an eye of jealousy upon every note which does not carry their

own mark.

The great point of their ambition is to gain credit with the national

bank; and could they obtain of that company to receive their notes, or

to give them credit for their draughts, in cases of necessity, they

would be at their ease; because the national bank would then be at the

whole expence of providing coin and bills, and they would have nothing

to think of, but to extend the sphere of their own circulation.

With respect to all these subaltern societies, the national bank will no

doubt steer an equal course. I suppose every one to be settled upon good

security; without which they do not deserve the name of banks.

In proportion to their stocks, and according to the state of the

national balance, they may, as well as any private person, on many

occasions, draw considerable supplies of coin from the national bank,

without lying under any obligation to it; because when exchange is low,

they can realize any part of their stock into coin, out of the national

bank, at very little loss, excepting the interest of it: for interest

must always be reckoned upon every guinea which lies in their chest.

Did these banks consider one another in a proper light, they must see in

an instant that the solidity of every one is equally good; because I now

suppose them all standing upon the principles of private, not mercantile

credit, as above explained.

What benefit then can they possibly reap from their mutual jealousies,

from gathering up each other’s notes, and coming with a run upon one

another from time to time? The consequences of this will be, to oblige

themselves and others to preserve for _domestic circulation_ a larger

quantity of coin than is necessary, and thereby to diminish their own

profit: to take up their attention in providing against their own

reciprocal attacks, and thereby neglect the providing a supply for that

demand which is indispensable; to wit, the payment of the grand balance

due to other nations; at which time the resource of the national bank

will certainly fail them. The managers of every one of them will pretend

that it is they who are saddled with this burden; but the nature of the

thing speaks for itself.

Wherever this grand balance is transacted, the exchangers residing in

the place will have recourse to the bank there established; and if there

be more than one, that which pays with the greatest readiness will have

the best credit, the most notes in circulation, and the largest profits

upon the whole. If any one is found slow, or difficult in paying its

paper, exchangers will be the more punctual in making their demand for

payment, and they will even be averse to receiving such notes from their

correspondents.

Every man who has occasion for credit from a bank, will apply to that

whose notes are the most esteemed. In short, there will be profit, in

the main, to the bank which pays the best, although I allow that at

particular times there may be some additional inconveniences, unless a

regular plan be laid down on the principles above deduced.

This however is a vague reasoning; because the matter of fact is not

known. All that can be said with certainty, is, that while no public

regulation is made with regard to banking, every one will carry on the

trade according to his views of profit; and private animosities between

different companies, will only tend to distress the nation and

themselves, as experience has, I believe, discovered.

If, as matters stand, a very great inconvenience results to Scotland

from the want of a communication of paper credit with England, and if

thereby an exchange of 4 and even 5 _per cent._ has been paid for bills

upon London, because all the coin of the country is locked up in banks;

I ask what would be the consequence, if banks had their will in

banishing from the circulation of their own district, every other notes

but their own? In that case, we might, in a short time, find an exchange

of 4 and 5 _per cent._ between Fife and Lothian, between Glasgow and

Ayr, and so of the rest. What would then become of manufacturers, who

could not dispose of their work at the distance of a few miles, without

having recourse to exchangers for their payment? If such an abuse were

once allowed to creep in, there would be no other remedy but to destroy

banks altogether, and throw the little coin there is into circulation.

On the other hand, when banks are in a good understanding, when they are

established on solid principles, when their paper is issued on proper

security, the public is safe; and in every little district, under the

wings of their own bank, there will arise a set of exchangers, who will

give credit to merchants and manufacturers, and who will have recourse

to their own bank for the coin or bills necessary for their occasions.

This will naturally divide the payment of the grand balance among them,

in a due proportion to their circulation.

I shall now consider the principles which may direct a statesman to

settle banking upon mortgage on a proper footing, to serve every

national purpose.

------------------------------------------------------------------------

CHAP. XVI.

_Of some Regulations proper to be made with regard to national Banks._

From what has been said, we may conclude, that were a national bank upon

mortgage, established on a plan calculated to answer the purposes of the

most extensive domestic circulation, it might be regulated in the

following manner.

1_mo_, Let a large stock of property, of one species or other, be

provided, in order to gain the confidence of the public, and let it be

pledged for the payment of all the notes.

2_do_, Let all solid property intended to be melted down into paper

money, be first constituted in such a manner as to be easily sold, and

in the mean time secured to the company, for their advance, preferably

to every other person, and let it be of a revenue fully sufficient to

acquit the interest for ever.

3_tio_, The capitals due to the bank must not be demandable by the bank,

as long as the interest is regularly paid.

4_to_, Every one who constitutes his property according to the

regulations, must be entitled to a proportional credit from them.

5_to_, All bank securities must be pledged in the hands of government

for the interest of whatever money the bank may borrow with their

consent, beyond the district of their own circulation.

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

their funds.

7_to_, Let bank notes be payable to bearer, either in coin, or in inland

bills to the value, or in a transfer of a corresponding interest at —

_per cent._ all in the option of the holders.

Were such regulations established, the borrowing from banks would become

very easy; any man who is master of his property, though incumbred with

debts, might put it into bank regulation, might raise upon it what sum

he thought fit, with which all his debts might be paid off; he might

even give credit upon it to those who otherwise are not in a situation

to obtain it: for which credit given, a profit in the rate of interest

might be allowed to him. Were a plan concerted consistently with the

principles which have suggested this general sketch, all borrowing and

lending of money would soon center in the bank. Securities would be

easy, and expence greatly avoided.

A national bank, when rightly constituted, may however be safely

indulged in more extensive methods of circulating their paper than upon

land security. The bank of England is allowed by charter to issue notes

for discounting bills of exchange, it may trade in gold and silver, may

advance money to government upon the security of taxes imposed and

levied within the year. But it is in general debarred commerce, and

every precarious object of traffic. The reason is plain. The paper it

issues becomes the property of the nation, and may form in a short time

the greatest part of the currency of it. In such a case, were the bank

exposed to losses by trade, or insolvency of debtors for great sums, the

whole credit of the nation might be ruined, and all the lower classes of

the manufacturing inhabitants undone, before such a blow could be

repaired.

Under proper regulations, bank paper might be made a legal tender in

every payment: in which case it is hardly possible that any considerable

demand for coin should ever be made upon them, except for the payment of

the _grand balance_.

This national bank may have different offices, in different cities

within the kingdom, and these will make subaltern banks both useless and

unprofitable. It might even be stipulated, that a certain proportion of

bank stock, in the name or for the behoof of any city, should entitle

that city to a proportional part of the administration within their own

district. As these are only speculations, not plans, I need not set

about removing objections, which are constantly many and well grounded,

whenever any new establishment or innovation is proposed. All I aim at

is to set this principle in a clear light, to wit, that it is the

interest of every trading state to have a sufficient quantity of paper,

well secured, to circulate through it, so as to facilitate payments

every where, and to cut off inland exchanges, which are a great clog

upon trade, and are attended with the risk of receiving the paper of

people whose credit is but doubtful.

For this purpose, I have proposed that inland bills should be demandable

from the bank at par, as well as specie.

It would be an admirable improvement upon this scheme, to make a like

regulation as to foreign bills. However, this speculation is reserved

for another opportunity. All I shall say, at present, upon that head,

is, that as we have seen how the whole national balance must be paid by

banks (who circulate paper payable in coin on demand, and who

consequently must, on some occasions, draw the metals from abroad for

that purpose, in order to fill up the void made by exchangers, who send

them out) and it would, I think, be shortning, in some measure, that

operation, and be a means, at the same time, of indemnifying the bank in

this respect, to regulate matters so, that all foreign exchanges might

be transacted there at fixed rates, according to the place where the

exchange is to be made, without erecting any monopoly for that purpose

in favour of the bank, or depriving any one of the liberty to deal in

exchange, who can afford it at more reasonable terms than the bank; but

of this more when we come to the doctrine of exchange.

------------------------------------------------------------------------

CHAP. XVII.

_When and in what case Banks should be obliged to keep open Books._

If no national bank be established under proper regulations, and entire

liberty allowed to every one to take up the trade who can issue his

notes, I think it would be against all principles of good policy not to

oblige such banks to keep open books, to be inspected regularly by some

authority or other; in order to see upon what security that paper

stands, which is the instrument of commerce, a part of every man’s

private property, and which, if any part of it should once fail, either

through the knavery, misconduct, or misfortune, of a particular company,

would cast a general discredit upon all paper, and be a means of

bringing on those calamities which we have so often mentioned.

I know the ordinary objection against this, is, the inconvenience of

throwing open the secrets and mysteries of trade. As to the mysteries of

trade, this point shall be examined in another place. But here, I say,

there is no question of trade in which any risk is implied: and if any

one can suppose, that, at any time, the affairs of a bank are in so

ticklish a situation as not to bear inspection, that very supposition

shews how necessary it is not to permit such a bank to continue this

circulation. The only inspection, in which the public is interested, is

to know the quantity of notes issued, and the extent and nature of the

securities pledged for them. They have no business to examine the state

of their cash, or of particular people’s credit. They may be without a

shilling in their coffers, and still their paper be as good as if they

had a million. Such an inspection, as I propose, would rather confirm

than shake their credit, but it would be a means of preventing them from

launching out into speculations in matters of commerce, which is not

their district; and from gaming with national property.

If it be said, that this inspection would lay open the affairs of many

private men, debtors to the bank, I answer in the negative; because no

man’s credit is hurt by his having a cash account, and no inspection is

requisite, as to the state of that accompt with the bank. The credit may

be either quite full, or quite exhausted; this particular interests no

body but the parties themselves; but it is essential to know upon what

security the credit has been given; because every man who has a note of

such a bank in his possession, has a very good title to be informed

concerning the security on which it stands.

It is not sufficient to say, that the holder of the note, if he doubts

of the security, may demand payment. It is not here the interest of any

individual, but that of the public which is attended to: and if,

according to the principles of common reason, it be just, that a

creditor should have it in his power to watch over the abilities of his

debtor, so as to secure his payment; certainly it is equally just, that

the public (which I consider here as the creditor) should be made

certain, that what is circulating with as great facility as the King’s

coin, contains a real value in it. Would it be a good answer from any

man who held a piece of false money in his hand, for the use of

circulation, to skreen himself, by alleging that if it be false, no body

need to take it. It is the right of every man to detect false coin; but

it is the right of government _only_ to detect false paper: because law

only can authorise such an inquisition. Does not the charter of the bank

of England establish this right in government? If the bank be confined

to certain particular branches of solid trade, where little risk is

incurred, might not government examine, when necessary, whether these

regulations have been observed; and how can this be done without such an

inspection as is here recommended?

------------------------------------------------------------------------

CHAP. XVIII.

_Is it the Interest of Banks to grant Credits and Cash Accompts to

Exchangers and others, who make a Trade of sending Coin out of the

Country?_

The answer to this question is very short.

From the principles we have deduced, it is plain, that it is both the

office and interest of banks to give credit to all who can give good

security for it.

The cause of doubt upon this question, arises only from certain

inconveniences which have been of late experienced in Scotland; but

which never would have been felt, had banks attended to their true

interest, in providing funds to answer the demands of those who are

either obliged, or who find an interest in paying off what the nation

owes upon the grand balance to foreigners.

To set this matter in a clear light, let me suppose that, some time ago,

the banks had at once withdrawn all the credits granted to exchangers;

and opened a subscription for a loan of money, equal to what they might

estimate the sum borrowed by that set of men within the country, for the

sake of carrying on their business.

According to principles, these two operations should go hand in hand:

the recalling the credits would, no doubt, have greatly distressed

exchangers; but as long as they could find money to borrow from private

hands, that inconvenience would have been lessened. Besides, I apprehend

that the late custom among exchangers, of borrowing at 4 _per cent._

owes its existence to the difficulty they felt in obtaining extensive

credits from the bank; and if this be the case, then there has been a

_lucrum cessans_ to the bank of 5 _per cent._ upon the amount of all

these borrowings; because exchangers, I apprehend, would prefer a credit

from the bank at 5 _per cent._ to a loan at 4 _per cent._ payable on

demand, according to the occasions of those who keep their money with

them.

The most effectual method, therefore, to hurt exchangers, would have

been to have recalled all their credits, and offered to borrow, upon the

same terms, what was lent to them.

The execution of such a plan would, I think, have been, 1. diametrically

opposite to the interest of the banks; 2. would have occasioned such a

run upon exchangers, as to throw them into great distress; and 3. would

have ended in the total ruin of the trade of Scotland.

That such a plan is diametrically opposite to all principles of banking,

I suppose, is by this time sufficiently understood.

That it would have occasioned a run upon exchangers, is pretty certain:

because however good their credit might be, it must be acknowledged to

be inferior to that of the banks; and therefore no body would prefer

them for debtors, to the bank, upon the same terms.

The third consequence is as evident, upon a short reflection, as the

other two. The run upon the exchangers would have obliged them to make a

call upon all the merchants and dealers in Scotland, to whom they gave

credit: for which purpose, and for which alone, they find an interest in

borrowing at so high an interest as 4 _per cent._

The call, then, made by the exchangers upon their debtors, is neither

more or less than a call upon the money employed in the trade of

Scotland.

Now we have said, that whoever owes _must pay_. The merchants of

Scotland owe to exchangers; the latter are pressed by their creditors,

and _must pay_ with what they have, which consists in money only: when

that is exhausted, they must shut up shop. _They_ again call upon the

merchants, who _must pay_ with what they have. This consists in goods,

and in the manufactures of Scotland; and these they _must_ sell at any

price. There may not be time sufficient to export with advantage. To

whom then must they sell? To people within the country, who have no

money to buy with; because credit is withheld by that body which only

can give it. I conclude with the old saying of the law,

_Unum quodque eodem modo solvitur quo colligatum est._

The best method to establish credit in an industrious nation, is a bank

properly regulated: and the best methods to ruin it effectually, when

established, are the inconsistent operations of such a bank.

------------------------------------------------------------------------

CHAP. XIX.

_Application of the Principles above deduced, towards forming the Policy

of Circulation._

From the principles above deduced, there arise three principal objects

of attention.

The first, the circulation of paper for domestic uses.

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

The third, the method of paying foreign balances.

These three objects are absolutely different in their nature, and they

are influenced by different principles. The consequence of blending them

together, is to render the subject, which is abundantly intricate in its

own nature, still more dark and perplexed. What is to follow has no

relation to any plan proposed for execution; it is only intended as a

farther illustration of the general principles which influence this

branch of my subject.

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

It has been said, that the great utility of banks of circulation upon

mortgage, was to facilitate the melting down of solid property; in order

to enable every one who has property, to circulate _the capital_ of it

for the advancement of industry.

For this purpose he comes to a bank, pledges the capital he wants to

melt down, and receives for his obligation, bearing interest, paper

money which bears none.

This paper money, I suppose to be as solidly secured as the principles

of private credit can make it. I suppose the bank to be established by

authority, according to the regulations already mentioned, and the notes

made a legal tender in every payment of _domestic debts_; by which I

understand _debts_ payable within the country.

From these data, I say, that the regular method by which the bank should

acquit the obligation in the notes, is by restoring the security granted

at issuing the notes, if they be returned by the debtor in it; or by a

transfer of a sum of interest equivalent to the notes, if they are

presented by any other. All farther obligations laid upon banks to pay

in coin, or inland bills, is only an equivalent expected from them in

lieu of their great profits[12].

Footnote 12:

It must here be observed, that in every country where there is a

national coin established, it is absolutely necessary to connect with

it the denominations of the paper; in order to affix a determinate

value to these denominations. This may easily be done without

implying, as at present, an obligation on the bank to realize into

coin every bit of paper in circulation.

The _interest_, therefore, of the credits given by the bank, may be

demandable from the debtors in coin; and the transfers of interest

made by the bank, to those who bring in notes for payment, may also be

demandable in coin from the bank.

These payments will bear a small proportion to the paper in

circulation, as interest must be very low; and coming at fixed terms

of payment, provision will easily be made for them.

This regulation will support the coin of the country, and as the

_interest_ of all the paper becomes demandable in coin, the intrinsic

value of the _interest_ will effectually support the value of the

_capital_.

When paper issued for domestic circulation returns to a bank, were it

not for the profits on their trade, I see no reason why a bank should

pay in any other species of property than what it received; and if, by

the interest they receive for their notes, they are abundantly

indemnified for all the difference between paying in coin and in

transfer, I think the public would be a gainer to dispense with that

obligation in lieu of an abatement of interest; which would be an

advantage to commerce, not to be counterbalanced by the other.

Farther, the business of providing coin is totally different from that

of supporting domestic circulation: it is founded on different

principles: it requires men of a particular genius to conduct it: the

difficulties to be met with are not constant; and therefore cannot form

a regular branch of bank administration.

2_do_, The method of providing coin for domestic circulation is the

business of mints, not of banks.

I have, in the third book, treated very fully of the doctrine of coin,

and of mints. I have shewn the difference between money, which _is the

scale for reckoning value_, and coin, which _is certain denominations of

money, realized in a proportional weight of the precious metals_. I have

shewn how necessary a thing it was to impose the price of coinage upon

the metals manufactured into coin: and I have said, that it was

inconsistent with all principles, to allege that the metals, when

coined, should thereby acquire no additional value.

The expence, therefore, of providing the metals should be thrown upon

those who want coin; and the mint should be obliged to convert gold and

silver into coin, upon the demander’s paying the coinage.

This coin loaded with the price of coinage, never will be sent abroad to

pay a foreign balance; never will be locked up in banks, which will have

little occasion for it. It will, therefore, remain in circulation, and

serve those purposes for which the inhabitants think fit to employ it.

This coin, I say, never will be exported, as long as any uncoined metals

can be found in the country: and if upon a national distress it is

thought fit to facilitate the exportation of it, the state may (as we

observed above) appoint the mint to receive it back, in order to melt it

down into ingots, stamped with the mark of sterling, repaying to the

bearer —— _per cent._ of the coinage.

3_tio_, The trade of paying off foreign balances will then become a

particular branch of business: of which we shall treat more at large,

when we come to examine the principles of exchange.

All that is necessary to be said in this place, is to recal the

principle we have mentioned above, viz. that when a nation cannot pay in

her metals, manufactures, and natural produce, what she owes to

strangers, she must pay in her solid property; that is, she must

mortgage the revenue of such property, for a capital _borrowed out of

the country_, which capital she must employ for the payment of her

foreign debts.

This operation then should be performed by a regular and systematic

plan.

------------------------------------------------------------------------

CHAP. XX.

_Objections to this Doctrine._

That bank notes can never be received as specie, but from a persuasion

that they may be exchanged for it on demand.

To this I answer, that it is sufficient they be received as value; and

that they answer every purpose in carrying on alienation. The use of

_money_ is to keep the reckoning between parties, who are _solvendo_;

the use of specie or coin is to avoid the inconvenience of giving credit

to persons who perhaps may not be so.

When merchants make delivery in accompt, they then give credit to their

customers: when they sell for bank bills, they give credit to the bank:

when they are paid in coin, they give credit to no body; because they

receive the real value in the coin. Where then is the difference between

receiving the real value, and receiving an obligation for it, concerning

the validity of which every one in the country is perfectly satisfied?

Is there a merchant, in any country in the world, who will sell one

farthing upon an hundred pounds cheaper to a person who pays in coin,

than to another who pays in good paper; unless the extrinsic

circumstances of the country should, at that time, give an advanced

price to the _metal_ of which the coin is made.

Money, we have said, ought to be invariable in its value: coin never can

be so, because it is both _money_ and _merchandize_: money, with respect

to the denomination it carries by law; merchandize, with respect to the

metal it is made of.

But it is urged, that if I have coin I may pay any where within the

commercial world, at the expence of transportation, and insurance. I

grant this to be true.

But I answer, that the principal use of coin, is, not to send it out of

the country; but to keep accompts clear among inhabitants within the

country. If there be a variation in the value of coin, according to

circumstances, that variation must affect the inhabitants in their

transactions. No one can gain upon this coin, without supposing a

relative loss to some other, whether they perceive it or not. Must not

this disturb all reckoning? Must it not disturb prices? Since at

different times, I may be paying the same denominations of coin for the

same commodity; and yet be paying, really, more value at one time than

at another. Is not then the most invariable money the best calculated

for the interest of trade, and prosperity of manufactures? Whence arise

complaints against paper money, and regrets for want of coin? They issue

from those who both wish to profit of the rising value of the metals

contained in the coin, and who endeavour to persuade the public, that

its interest, and not their own, is their object.

What a trifle is a foreign balance, let it be ever so great, compared

with the whole alienations of a country! Is it reasonable to disturb the

harmony of all domestic dealings, in order to furnish an opportunity to

a few clear-sighted people, who can, upon some occasions, profit of the

fluctuating value of the substance of which the coin is composed, to the

prejudice of the ignorant? If the country owes a balance to other

nations, let it be paid: nothing so just; nothing so essential to the

interest of the country which is the debtor. If the precious metals are

the most proper vehicles, as I may say, for conveying this value, let

them be procured and sent off; but never let us say, that because _some_

of our money _may_ be made of that metal, that all our money should be

made of it; in order that those who transact the balance may have an

opportunity of sending our metals away with greater ease, and thereby of

depriving us of the means of carrying on alienations among ourselves.

Let every one that has coin send it away: nothing can be more just;

nothing more consistent with principles: but let him send it away as a

_manufacture_; carrying in its bosom the price of making it, which he

has paid, and for which his foreign creditors will make him no

allowance.

Exchangers run to the coin of the nation, for paying, with the least

expence to themselves, the balance they are about to transact. When that

resource is cut off by the imposition of coinage, the nation will

preserve at least her darling specie; and then exchangers will be

obliged, by the best of all compulsions, their own interest, to think of

other expedients; bullion, manufactures, and natural produce. And when

all these come to fail, a regular plan must be laid down, and authorised

by government, for obtaining credit in other countries, by mortgaging

the revenue of the solid property of the kingdom; according to the

principles we shall discover when we come to treat of exchange.

------------------------------------------------------------------------

CHAP. XXI.

_How by a return of a favourable Balance the Bank may be enabled to pay

off the Debts due to Foreigners, and thus deliver the Nation from that

Burthen._

We have said, that the banks in contracting debts, and mortgaging the

property of Scotland to strangers, for the payment of a grand balance,

really acted as the guardians of the public, by interposing their

credit, and by constituting themselves as debtors for the whole; taking

for their relief, proportional securities upon the effects of

individuals.

We have also pointed out how, by this operation, the mass of bank

securities comes to be greatly augmented.

Before the payment of any balance for the behoof of Scotland, the

securities in the hands of the bank can only be equal to the notes in

domestic circulation, and accumulated profits thereon. Let this be

called (A). In proportion as these notes come back upon the bank, in a

demand for bills to pay balances, in the same proportion is there a sum

of securities added to the former mass (granted upon new credits given

for filling up the void thereby occasioned to circulation) which

quantity I shall call (B).

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

circulation.

(B) represents the securities equivalent to the debts contracted by the

bank in favour of strangers.

Now let us suppose trade to become favourable; or that the interest of

the money, which the natives had sent abroad, to invest in foreign

countries, begins to flow back: what will be the effect of this?

I say, that this balance will be paid to Scotland, either in coin, or in

the metals, or in produce, or in manufactures, or in bills.

In every case, it must be supposed to be beyond the consumption of

Scotland; otherwise it will not be a balance in their favour. Whatever

part of it, therefore, proves to be beyond the consumption of Scotland,

will be turned into money. This money must either consist in the metals,

or in foreign bills. If it consist in the metals, it will, if coined,

fill up, _pro tanto_, a part of circulation; this will make a

proportional part of bank paper return upon the bank, and extinguish a

proportional part of their securities; which we have called (A). But

then there will be more coin in circulation than formerly; consequently,

more coin will enter into payments made to the bank than formerly. But

we must suppose, that before this favourable turn of commerce, there was

coin enough both in the bank and in the country for the uses of domestic

circulation; consequently, the bank will send off this superfluity of

coin, and with it they will refund a part of the debt they formerly

contracted.

Through all this chain of reasoning, we must always suppose the money in

circulation to be _a determinate sum_; otherwise the superadding this

foreign balance in coin will not occasion, as we have said, a return of

a proportional part of the bank paper.

In the next place, let us suppose this favourable balance to consist in

foreign bills, upon London, Amsterdam, &c. These will be discounted by

the bank, and notes issued for them. The bills will be sent off by the

bank, in order still to extinguish a part of what is owing to

foreigners. These notes, again, being superfluous to circulation, which

we suppose to be full, will return upon the bank and still diminish the

mass of (A).

By these operations we see how (A) will be constantly diminishing; but

then in the same proportion we see how the mass of foreign debts will

also be diminishing: consequently (B), which was engaged for them, will

be returning to be the free property of the bank; and as we suppose no

variation upon the sum in circulation, we may consider this as a sort of

conversion of (B) into (A), and when all (B) shall be thus converted

into (A), then the debt formerly contracted by the bank, in favour of

Scotland, will be totally paid off by the same method (only inverting

the operations) by which it was contracted.

------------------------------------------------------------------------

CHAP. XXII.

_Of Banks of Circulation established on mercantile Credit._

I have examined, with all the care I am capable of, the nature of banks

calculated for the melting down of solid property, and converting it

into paper for the use of circulation.

The nature of such banks is but little known in countries where they

have not been established, and a distinct account of them may suggest

hints, which in time may prove useful.

People who do not employ their thoughts on the theory of trade and

credit, are apt to overlook objects of real utility; and those who do,

have seldom the opportunity of being informed of the customs of

different nations. Were my experience greater, or had I more

opportunities to dive into the recesses of this great object, the work I

now present to the public would better deserve its attention.

I now proceed to a deduction of the principles upon which are founded

those banks which are principally calculated for the use of commerce;

and as the ground-work of my inquiry, I shall trace some of the

principal operations of the bank of England.

The establishment of this great company was formed about the year 1694.

Government at that time having great occasion for money, a set of men

was found who lent to it about 1,200,000_l_. sterling, at 8 _per cent._

for the exclusive privilege of banking for 13 years; with this

additional clause, that 4000_l._ sterling, _per annum_, should be given

them to defray the expence of the undertaking. This sum of 1,200,000_l._

sterling, was the original bank stock. It has been since increased to

11,000,000_l._ by farther loans to government, for the prolongation of

their privileges; as has been taken notice of in the 16th chapter of the

second part.

This stock, as in banks of circulation upon mortgage, is only to be

considered as a subsidiary security to the public for the notes they

issue: were it the principal and only security for their paper, this

bank would then be founded on the principle of public, not of mercantile

credit; under which last denomination we are going to point out in what

the nature of it differs from those we have already explained.

It is a rule with the bank of England to issue no notes upon mortgage,

permanent loan, or personal security. The principal branches of their

business may be comprehended under four articles, viz. 1. The

circulation of the trade of London: 2. The exchequer business of Great

Britain: 3. The paying the interest of all the funds transferable at the

bank: 4. Their trade in gold and silver. I shall now shortly explain the

nature of these four great operations; and first as to the circulation

of the trade of London.

When we speak of the circulation of trade, we understand the circulation

of money paid on the account of trade.

The great occupation of the London merchants engages them to simplify

their business as much as possible. For this, they commit to brokers

every operation which requires no peculiar talents or ingenuity in the

merchant himself; and, for a like reason, they commit to the bank and

private bankers the care of their cash.

A Scots merchant begins by drawing money from the bank, for which he

pays interest: a London merchant begins by putting money into the bank,

for which he draws no interest at all.

A London merchant, therefore, can give no order upon the bank, unless at

a time when he has money lodged in it.

If he has occasion for money at any time, he sends to the bank the bills

he has, before they become due, and the bank discounts them at certain

rates, according to their nature.

If it be a foreign bill, the bank in discounting it, retains of the sum,

at the rate of 4 _per cent. per annum_, for the time the bill has to

run; but if the bill be at a longer day than 60 days, they will not

discount it. So in this case, the merchant must keep his bill until it

is within 60 days of the term of payment.

The reason for this is evident: the security upon which such bills

stand, is purely mercantile. The nearer, therefore, the payment is, the

less risk the bank incurs from the failure of those who are bound in it.

The intention of this operation of discounting bills, is plainly to

employ the cash in the bank in a way to draw an interest for it; but as

merchants allow their money to lie dead for as short a time as they

possibly can, the bank must have quick returns for what they advance

upon discount, in order to be constantly ready to answer all demands.

This is no loss to the bank, and a prodigious advantage to trade, as I

shall briefly explain.

The bank is constantly receiving cash from every person who keeps their

cash with it. This occasions a constant fluctuation of payments, which

of course must leave at all times a considerable sum of other people’s

money in the bank; because it never is in advance to any one.

By long practice in the trade, this sum of money becomes determinate:

let us call it the _average-money_ in the hands of the bank. It is then

with this average-money alone, that the bank can discount bills. Now if

the trade of London does afford bills to be discounted at different

dates within 60 days, sufficient to absorb the whole average-money of

the bank, appropriated for discounting; this branch of business would

not go forward with the celerity required for the trade of London, did

the bank indulge merchants so far as to discount at a longer day.

From this we learn another reason why the bank of England discounts no

bill which has more than 60 days to run. The first, mentioned already,

is for the greater security of payment; and the second, which we now

discover, is in order to be able to discount more bills than otherwise

they could do, did they discount at a longer day.