and paper, and wantonly playing with every man’s property, the creditors
saw themselves standing on the brink of a precipice; and finding,
instead of a good contract on the town-house of Paris, a bank note put
into their hands, which might be diminished in its value by one half
every month, while at the same time the coin might be raised to double,
it was very natural to suppose, that the intention of the King’s
ministers was to withdraw from them totally these 80 millions, less or
more, to which they were entitled: in which case, there was an
annihilation indeed of all the notes; but there was no annihilation of
wealth: for in that case, the wealth was still the same, only it was
transferred from the creditors to the King the debtor: that is, the
creditors were defrauded.
On the other hand, stood the proprietors of the actions sold. These were
in use to make a traffic of buying and selling the 200,000 actions which
had been in their hands ever since September 1717, when they were first
created. For we have shewn, that the posterior creation of actions by
the united company, was a mere delusion, as they were all found in the
custody of the Regent. The actions, I say, were immediately put into a
state of stagnation; because of the discredit cast upon the bank notes,
with which it had been usual to buy them.
4_to_, I must observe, that the stagnation of a paper which carries no
interest, is equal to a temporary annihilation. The holder then is
deprived of the use of his money; and he is not paid for the loss he
sustains.
If, therefore, it had been possible to have given a new activity to this
bank paper, without allowing it to die away, as it were, in this
temporary fit of fainting, credit would have revived: all accompts would
have been kept clear, for this is the use of paper money, and so short a
shock would hardly have been felt.
But the great damage resulting to the public, upon every occasion of
this kind, proceeds from the _delay_ in applying the proper remedy. When
any paper is discredited, it immediately falls in its value. The person
then who is the original and real creditor for the whole value, and in
whose hands the paper is when it suffers the discredit, sells at
discount: this is an irretrievable loss to him; and when the paper
recovers its credit again, either in part, or on the whole, the profit
then belongs to the person who had bought it at discount, and does not
go to indemnify the real sufferer.
This was the case with respect to the notes of the French bank: they
were allowed to languish from the 21st of May that they were
discredited, until the 10th of October, when their fate was decided, as
has been said.
Farther, we have seen, that this whole movement of credit had for its
basis 80 millions a year, originally paid to the creditors for their
interest. This sum answered to the capital of 2000 millions; because at
the old King’s death, interest was fixed at 4 _per cent._
When, by the operations of the system, all this capital was turned into
money, that is, bank notes, the regorging plenty of it made interest
fall to 2 _per cent._ consequently, the capital, which constantly draws
its value from the interest paid for it, rose to 4000 millions. We have
said that the total value of the paper rose to 6000 millions; but we
must reflect, that above 2000 millions of these 6000 millions was in
bank notes, and employed in buying of actions. So that both the notes
and the actions must not be reckoned as existing together.
Had the Regent sold the actions, he would have burnt 2000 millions of
bank notes, and thus the value in paper would have remained at 4000
millions, so long as interest remained at 2 _per cent._; and had
interest fallen still lower, and dividends remained at 200 livres _per_
action, the value of actions, and consequently of this capital of 4000
millions, would have risen in proportion, just as the value of the
capital of the debts of Great Britain rises and falls according to the
rate of money; although the same sum of interest be paid to the
creditors at all times.
This augmentation, therefore, upon the value of all capitals, during the
Missisippi, of lands as well as actions, was in consequence of the fall
of interest, and from no other artifice whatever. Lands in France, at
that time, sold at 80 and 100 years purchase. [Dutot, Vol. II. p. 200.]
When credit failed, and when all the circulating paper was thrown into a
state of stagnation, interest rose, in proportion to the deficiency of
the supply for the demands of borrowers. The value of capitals then
diminished. But this might have happened from another cause, had there
been no bankruptcy, or intention to defraud the creditors: a war might
have produced it; or any circumstance which might have raised the rate
of interest.
The rise, therefore, upon capitals, from the fall of interest, I
consider here as no acquisition of wealth: I reckon wealth to be that
which is the annual produce of the capitals.
So much for the resolution of this wonderful phænomenon.
I must now shew that in the height of the distress, the confidence of
the public was still to be regained, and credit recovered, even after
the fatal _arret_ of the 21st of May 1720.
I lay it down as a principle, _that whoever has a sufficient fund, and
pays interest regularly for the money he owes, runs no risk of losing
his credit_.
So soon, therefore, as the Regent found that by his _arret_ of the 21st
of May, all credit had disappeared; had he, upon the 27th of the same
month, or at the time he raised the coin to 82 livres 10 sols _per_
marc, ordered all bank notes presented to the bank, either to be paid in
coin, or marked in the books of the bank as bearing interest at 2 _per
cent._ I say, credit would not have suffered in any comparison to what
it did. No body then would have sold a note at discount; and had it been
necessary, he might have ordered the interest to be paid monthly.
The authority I have for this opinion is Dutot, who says, that upon
opening the subscription of 25 millions in the month of June, the notes
fell in their value 11½ _per cent._ only.
Now the rate of this subscription was at 2½ _per cent._ as we have seen;
consequently, if 100 livres of notes lost but 11½ _per cent._ they were
worth 88½ livres in coin; but these 100 livres in notes were worth 2½
_per cent._ because the subscription was open at that rate: consequently
88½ livres in coin was also worth 2 livres 10 sols _per annum_:
consequently interest, at that time, was at 2.825 _per cent._ that is,
below 3 _per cent._ even after the bankruptcy.
Where then was the great harm? Where was the occasion to fly immediately
to the destruction of actions, which were in the Regent’s own hand? A
little patience, and good management, would have set all to rights.
I would, therefore, have left the notes in circulation under this
regulation, viz. that such as should be presented to the bank should
have had a transfer of 2 _per cent._ paid quarterly; or a value, in
actions, at 10,000 livres _per_ action; which is the capital answering a
dividend of 200 livres at 2 _per cent._ at the option of the holder: and
in case interest had come to fall still lower, the price of actions
might have been augmented.
I would have set before the public a full and exact account of the
company’s funds. I would have banished all mystery from the affairs of
credit. I would have registred a declaration in parliament, setting
forth,
1_mo_, That all future changes either upon the denominations of paper or
coin, were contrary to the maxims of good government.
2_do_, That all stipulations between the King and his creditors were to
be inviolable. And,
3_tio_, That the parliament of Paris should for ever remain invested
with an exclusive right to watch over those regulations in time to come;
and I would have bound the parliament by a special oath for that
purpose. I would even have had the King to take the same oath: and he
might have ratified it at his coronation in 1725.
By these steps I should have vested a new power in the Kings of France
which they never had before: a power of having money from their
subjects, from their allies, and from their enemies: a power they have
not, nor ever will have, until the principles of credit be better
understood among them.
Had such a plan been followed, I have not the least doubt, but that, 1.
The actions would have been sold at a very great advanced value above
the standard of 5000 livres, at which the Regent had bought them: 2.
That money would have come back to 2 _per cent._ and then, 3. Had banks
been established upon a proper plan, ease, with industry, would long ere
now have appeared in every corner of that kingdom.
How infinitely more easy would it have been to establish such a plan in
1720 than at present? At that time the most difficult part of the whole
was executed. The creditors had taken notes for their claims: the credit
then was given. There was nothing to be done but to support it. The
creditors were then at the mercy of the state: at present the state is
at the mercy of the creditors. Were such operations on coin to take
place at present, as were then familiar; were the King at present to
attempt to turn the constitutions of rent, perpetual and life-annuities,
into any other form than what they have, the credit of France would be
undone for a long time; and who knows what views of ambition a situation
so deplorable might not stir up in certain courts of Europe.
What state would pay its debts, if it _durst_ do otherwise? And what
state can diminish its debts in any other way than by lowering the
interest upon them? But of this more in the proper place.
------------------------------------------------------------------------
CHAP. XXXIV.
_How the diminishing the Denomination of the Paper in Circulation, by
the arret of the 21st of May 1720, destroyed the Credit of France, when
the same arbitrary Measures taken, with regard to the Coin, had produced
no such Effect._
This question is curious, and I shall endeavour to resolve it in the
best way I can, before I conclude this subject.
The first thing to be done is to point out the immediate effects which
resulted upon diminishing the denomination of the paper; because the
destruction of the credit of France was not the immediate consequence of
this _arret_; but the ultimate effect of a chain of consequences which
followed indeed very quick upon one another.
The paper had been declared, against the opinion of Mr. Law, by an
_Arret de Conseil_ of the 22d of April 1719, _une monnoie fixe_, as has
been said. Consequently, any diminution of its denomination was a plain
infraction of the public faith. From this declaration in the _arret_ of
the 22d of April 1719, the public reaped one notable advantage, which
was, that in borrowing and lending paper, every one was sure that the
obligations contracted could be dissolved by restoring the very same
species of property which had been received; but by diminishing the
denomination of it, by the _arret_ of the 21st of May 1720, all such as
were debtors, became obliged to discharge their debts at the expence of
double the sum of paper borrowed.
The immediate consequence, therefore, of touching the denomination of
the paper, was, to shew the public that their fortunes in paper were
liable to the same inconveniences as fortunes in specie; that is, that
they might be increased or diminished at pleasure. Upon this it was very
natural for every one to endeavour to realize his paper, and put it into
coin: since, _in pari casu_, it was better to have it in that which had
some intrinsic value, than in that which had none at all.
Of all the French paper, the notes were the most easily realized;
because there was contained in them a direct obligation upon the bank to
pay them in coin. The actions again were more difficult to be converted;
because in order to realize them, it was necessary to find people who
were willing to give either notes or coin for them.
A run upon the bank, therefore, taking place, upon the _arret_ of the
21st of May, it was obliged to stop payment: this occasioned a general
alarm, and _destroyed the confidence which the public had had in the
state_, which is what we mean by _public credit_.
This point explained, it remains to shew why the augmentations and
diminutions upon the specie should not have ruined the credit of the
paper.
1_mo_, The operations upon the specie affected the paper only
indirectly; but the diminution upon the paper affected it directly.
The operations upon the specie only affected that part of the paper
which was made to circulate as an equivalent for the specie; or in other
words, that part which people realized, either, 1. with an intention to
withdraw their funds altogether out of the scheme; or 2. to profit of
the operations upon the specie; or in the last place, to procure small
sums of money for common expences.
Now as to the first, the number of those who wished to withdraw their
stocks were inconsiderable, in proportion to the stock-jobbers; and
therefore their interest could not affect the general credit; and the
last was inconsiderable in every respect.
As to the second, the government made it very difficult for the
proprietors of notes to profit of the operations upon the coin. When it
was to be diminished, the diminutions were advertised some time before
they took place, and the diminution went on always by degrees. Thus
people who had paper, with which they could trade in buying actions,
constantly rising in their value, by the intrigues of the state, when at
the same time the denominations of the coin were diminishing, did not
carry their notes to the bank for two reasons.
The first, that the paper really gained by every diminution upon the
denomination of the specie, in an exact proportion to the diminution. A
livre in a bank note, while the specie was diminishing by intervals from
80 livres the marc to 65 the marc, gained regularly in the hands of the
possessor; whereas had he realized at any period but the last, the
subsequent diminutions upon the specie he had acquired with his paper
would have affected the value of it.
The second was, that by realizing he deprived himself of the profit of
stock-jobbing.
The only way, therefore, for the proprietors of the paper to gain by the
operations of the state upon the coin, was to guess the time when the
coin was to be raised in its value: but this was impossible; for the
rising was sudden and unexpected; whereas notice was constantly given of
the fall, at some distance of time.
For example, the money was suddenly raised the 5th of March 1720, from
60 livres to 80 livres the marc; and the 11th of the same month, notice
was given, that on the 1st of April following, it was to be brought down
again to 70 livres _per_ marc; and on the first of May following, to 65
livres. The consequence of this was, that from the 11th of March, people
were glad to carry money to the bank for notes, which were to stand at
the same denomination, whereas the silver was to diminish on the 1st of
April.
Accordingly a great sum, above 44 millions, was brought in during this
interval.
When the 1st of April came, and that the silver was brought to 70 livres
the marc, those who were in possession of the paper, were still
prevented from realizing; because of the future diminution which was to
take place. When this term was come, people had reason to imagine that
the silver would for some time stand at 65 livres the marc;
consequently, there was more to be gained in stock-jobbing with the
notes, than in realizing them in specie, which, in order to make profit
of it, must have lain dead until a new augmentation; which was a very
uncertain event. In short, there was no run upon the bank from the 1st
to the 21st of the month of May, when the famous _arret_ in question was
given. Then indeed the run came on with violence, and payment was stopt.
2_do_, The second reason why the effects were different when the state
changed the denomination of the coin, from what they proved to be when
the denomination of the paper was changed, I take to be this,
That in France the operations upon the coin had been familiar; and were
expected by every body: and, perhaps, the very making the paper a
_monnoie fixe_, had for this reason added to the credit of it. A most
surprizing thing! The state took care always to gain, whether they
raised, or whether they diminished the value of the coin. The
stock-jobbers, therefore, never minded the coin at all. If they could
profit by an augmentation by foreseeing it, they realized; if they could
see a diminution before notice was given of it, then they bought paper.
The operations on the coin principally affected such as were either
respectively debtors or creditors, to people who were obliged to pay, or
to receive their debts in specie; or who had a fixed revenue specified
in a number of livres. There the disorder was great, as has been
frequently observed.
3_tio_, The operations upon the specie never could destroy the intrinsic
value of it, however they might prevent the circulation of it for a
fixed legal denomination; therefore it remained under all combinations
of circumstances, a thing valuable to be acquired; and it still remained
a commodity, desireable by all, and was therefore constantly demanded.
But a discredit cast upon the paper had a different effect. The value
_there_ depended entirely upon the will of the state, and every body saw
that it was as easy to annihilate it, as to reduce it to one half. The
discredit, therefore, had the effect of stopping _the demand for it_,
that is, the currency; consequently, a run upon the bank immediately
took place.
4_to_, The rendring the value of the paper precarious, made every
possessor of it seek to realize it without delay. The proprietors of the
bank notes ran to the bank; and a run upon the bank, at a time when it
could offer payment for the notes in no other value than actions, was a
declaration of bankruptcy. Now it was the run upon the bank; it was this
claim which the subjects had a right to make upon the bank, for which
the King was guarantee, which destroyed the credit of France; and it is
very evident that no operation upon the specie could possibly produce
any such effect[19].
Footnote 19:
It was a capital mistake in this diminution upon the paper to make it
gradual. Was it not evident that every mortal would seek to realize a
note which was to diminish in its value progressively every month? A
note worth 10,000 livres, for example, the 22d of May, was immediately
reduced to 8000 livres, and the 1st of July, was to be worth only
7500. This was plainly solliciting a run upon the bank. The stroke
should have been struck at once.
In short, had this operation upon the paper been suspended for a few
months; had the people of France been indulged in a little more time,
their infatuation in favour of the actions would have carried them to
employ all their bank notes in the purchase of those which remained in
the hands of the state. By this operation the far greater part of the
notes might have been withdrawn and destroyed, and when the bank found
themselves in a situation to answer the call of all those which
afterwards remained in circulation, then the state might have boldly
ventured to diminish the price of actions: because if that stop had
occasioned a run upon the bank for the outstanding notes, there would
have been coin enough to answer them at their full value; and this would
have confirmed the credit of the bank more than any thing.
------------------------------------------------------------------------
CHAP. XXXV.
_How a Bank may be safely established in France, as Matters stand at
present._
The prerogative of the Kings of France is limited by no written law,
because he is acknowledged to be the legislature of his kingdom; and the
exercise of his power is only limited by maxims of state. The first of
which is, that he is to govern according to his laws, and not according
to his ambulatory will.
Now, in making of laws, the parliament have a sort of negative, _de
facto_; because the whole regular and legal execution of every law is
committed to them: and if they refuse to register it, they refuse to
execute it; and a law without _execution_ is, in fact, no law at all.
When the King’s will can be carried into execution by a single act of
power, the authority of parliament is of no effect in preventing it.
When this requires a train of systematical administrations, the
concurrence of parliament, who hold the whole regular execution of the
laws, is absolutely necessary.
Banks of deposit and of circulation, stand, it must be confessed, upon a
very precarious footing, under such a government.
An order from the King is at any time sufficient to command any deposit
of specie which can be made within the kingdom. While this is the case,
no paper can have any solidity, which draws its security from such
deposit.
Coin, therefore, must be banished from all banks in France: and the use
of them should be entirely limited to that of an office, for the keeping
of reckonings between people who have solid property, and who may want,
on a thousand occasions, to melt it down in favour of consumption,
trade, industry, agriculture, or the like.
In this light, a general bank may be established at Paris; and branched
out over the whole kingdom. The stock of it should consist in land
property, engaged unalienably, to make good the engagements of the bank.
Notes should be issued upon solid security, bearing no interest while
they circulate as money; and when they return upon the bank, either the
original securities may be withdrawn, or payments might be made by the
transfer of a corresponding perpetual interest.
Every province, every considerable city in the kingdom, should be
allowed to be interested in such a bank: and in every considerable city,
there should be an office for transacting such credits, and for
regularly receiving all payments of interest. If the King should think
fit to allow his mint to supply coin, or bullion, for bank notes
presented, at a determinate premium, he might by this operation advance
the commercial interests of his kingdom, in facilitating the payments of
a wrong balance of foreign commerce: but without that regulation, the
bank will be perfectly sufficient for promoting and supporting domestic
circulation. Every one who is able to give security for a certain
interest, will be sure to find money: and as the expence of conducting
such a bank will be very small, the interest for money will be very low.
As I said before, a bank of this kind would be no more than an office,
appointed for keeping accounts between people who are possessed of any
paper secured upon real and solid property: and farther, in the
beginning, at least, I would not advise to carry it.
The general accompt of the bank would appear in a few articles, viz.
Credits given, so much; _inde_ of interest to be received, so much.
Notes returned, so much; _inde_ of interest to be paid, so much; balance
in favour of the bank, so much.
A bank of this nature would answer every purpose for promoting industry
and domestic circulation.
Such a bank must neither issue, or ever receive coin in payment.
------------------------------------------------------------------------
CHAP. XXXVI.
_Of Banks of deposit and transfer._
I now dismiss the subject of banks of circulation. The unspeakable
advantages drawn from this institution, when properly regulated, in
supplying money at all times to those who have property, for the
encouragement of industry, and for improvements of all sorts, and the
bad consequences which result to society, from the abuse they are
exposed to, has engaged me, perhaps, in too long a discussion of
particular combinations of circumstances relating to them.
I now come to treat of banks of deposit or of transfer of credit: an
institution of the greatest utility for commerce.
These two species of banks differ essentially in two particulars.
1_mo_, That those of circulation serve the purpose of melting down
unwieldy property into money; and of preserving the quantity of it at
the proportion of the uses found for it. Those of deposit, are
calculated to preserve a sum of coin, or a quantity of precious
moveables, as a fund for carrying on the circulation of payments, with a
proportional value of credit or paper money secured upon them.
2_do_, In the banks of circulation, the fund upon which the credit is
built, is not _corporeally_ in the custody of the bank; in the other it
is.
The fundamental principle, then, of banks of deposit, is the faithful
preservation of the fund delivered to the bank, upon which credit, in
money, is taken for the value.
If at any time a bank of deposit should lend, or should, in any wise,
dispose of any part of this fund, which may consist of coin, bullion, or
any other precious moveable, once delivered to them, to the end that a
credit in money may be writ down for it in their books of transfer, in
favour of the depositor, and his assigns; by that act, the bank departs
from the principles upon which it is established. And if any bank is
established which, by their regulations, may so dispose of the fund of
their credit, then such a bank becomes of a mixed nature, and
participates of that of a bank of circulation.
These things will be better understood by reasoning from an example of a
true bank of deposit.
------------------------------------------------------------------------
CHAP. XXXVII.
_Of the Bank of Amsterdam._
Many authors have written concerning this great bank of deposit:
particularly, Davenant, Sir William Temple, Ricard, in his _Traité de
Commerce revu par Struyk_, the author of the _Essay sur le Commerce_,
and Mr. Megens, in his book, which has been translated into English,
under the title of _The Universal Merchant_.
In these authors we find a number of facts, which I shall combine with
my own informations, and here apply principles to them; in order to
communicate a distinct idea of this establishment. A detail of its
particular operations regards practice, and falls not within my subject.
The original intention of the States of Holland, in establishing the
bank of Amsterdam, was to collect a large capital in coin within that
city, which might there perpetually remain, buried in a safe repository
for the purposes which we are now to explain.
In order to accomplish this plan, they established the bank upon the
31st day of January 1609.
The method they fell upon to collect the coin, was to order, that all
bills of exchange, for any sum exceeding 300 florins, should be paid in
specie to the bank; and that the holder of such bills should, instead of
receiving the coin, have the value of it writ down in the books of the
bank to his credit, at his command, to be transferred to any person he
should appoint; but never more to be demandable from the bank in specie.
By this operation, the mass of coin circulating constantly from hand to
hand, between the merchants of Amsterdam, began, by degrees, to be
heaped up in the bank; and as the heap augmented, so did the sum of
credit augment upon the books of the bank.
It is evident, from this change in the mode of circulation, that no loss
could be incurred from the locking up of the coin.
As long as coin is in a state of constant circulation, it can produce no
interest to any person. Interest commences from the moment the coin
begins to stagnate; that is to say, so soon as it comes into the hands
of one who has no ready money demand upon him. When this happens the
proprietor lends it at interest.
Now the credit in the books of the bank, which is every day transferable
at the bank, answers every purpose of coin, either for _payment_ or
_loan_: and the proprietor has neither the trouble of receiving the
species, nor any risk from robbery, or false coin.
The first advantage the city reaped from this institution, was, to
secure the residence of trade in that place.
Capitals transferable only at the bank, laid the proprietors under a
necessity of fixing their dwelling where their funds were, and where
only they could be turned to accompt.
It had another excellent effect in commerce: it pointed out the men of
substance. A credit in bank is no wise equivocal: it is a fund of
undoubted security.
From the constitution of this bank we may form an estimate of the extent
of the deposit.
It can only swallow up a sum equal to what is necessary for circulating
the payments of the city of Amsterdam. Were a sum exceeding that to be
shut up in the bank, and were the credits written in the books of the
bank to exceed that proportion, it is plain, that the value of the bank
money would sink immediately. The reason is obvious: the credits
transferable are of no use to those who have no occasion to transfer;
that is, to pay, lend, or exchange at Amsterdam. So soon, then, as all
the demand of Amsterdam is satisfied, the proprietors of the overplus
will seek to realize their superfluous credit, in order to invest the
value arising from it, in some other place where a demand may arise.
In order to realize, they must sell their bank credit for coin; because
the bank pays only in transfer. Coin then would be demanded preferably
to credit in bank; consequently, coin would rise in its proportional
value to bank money, or bank money would lose, which is the same thing.
This fluctuation between bank money and coin, leads me to explain what
is called the agio of the bank.
------------------------------------------------------------------------
CHAP. XXXVIII.
_Of the Agio of the Bank of Amsterdam._
We have pointed out one motive for establishing a bank of deposit at
Amsterdam, viz. that of fixing the residence of trading men in that
city.
Another was, to prevent the inconveniencies to which a small state was
exposed, by the introduction of bad coin, from all the neighbouring
countries in Europe, with whom they traded.
In the territory of Holland there are no mines of gold and silver;
consequently all they have comes from other countries, as the return of
a favourable balance upon their commerce.
At the time the bank was established, the republic was in a state of
infancy; and any coin they had, was that of their old masters the
Spaniards. This was unequally coined; many pieces were light; many had
been clipped and washed. As they extended their traffic, they were
obliged to receive great quantities from Germany, which was still worse.
In order then to prevent the circulation of such coin, and the
perplexities occasioned by it in all accounts, they established a bank,
and fixed the standard upon a silver coin called the ducatoon, to which
they gave the denomination of 3 florins or guilders bank money.
But as this coin also was unequal, like all the rest of the specie in
Europe, before the introduction of milled coin, and the policy of
weighing piece by piece at the mint, the bank appointed the ducatoons to
be received in bags of 200 pieces, weighing together 26 marcs 5 ounces
10 engles of Amsterdam troes, or gold weight; which being reduced to
aces, (the lowest denomination in this weight) make 136,640 aces. This
divided by 200, gives, for the weight of 1 ducatoon, 683.2 aces.
Let us now convert these aces into troy grains, according to the
proportion established between Dutch aces and troy grains, in the last
chapter of the third book.
The equation will stand thus,
5192.8 aces, being equal to 3840 troy-grains, 683.2 aces, therefore,
will equal 505.21 troy-grains; which, consequently, is the weight of a
ducatoon, or of 3 florins bank money of Amsterdam.
Next as to the fineness of this coin:
The ducatoon was coined, according to the imperial standard, of 14 loots
16 grains fine: that is to say, it is 268⁄288 parts fine, and 20⁄288
parts alloy.
To find, therefore, the number of Hollands aces, and of troy grains of
fine silver in the ducatoon, state the two following proportions:
288 : 268 :: 683.25 : 635.75 aces fine.
288 : 268 :: 505.21 : 470.13 troy-grains fine.
In the last place, if we divide the number of aces, and troy grains fine
in the ducatoon, by 3, we shall see the exact weight of fine silver in 1
florin of Amsterdam bank money.
635.75⁄3 = 211.91 aces, and 470.13⁄3 = 156.71 troy-grains fine.
These calculations premised, it would be an easy thing to fix the exact
par of the metals, between sterling and bank money of Amsterdam, were
the British coin of legal weight, and were the metals there rightly
proportioned. But is it to be supposed, that any person who has bank
money of Amsterdam, would exchange, at the par of the metals, with
sterling silver, which is many _per cent._ too light, or against English
bank notes paid in gold, always overrated with regard to the silver, and
often too light also?
While, therefore, the coin of Great Britain stands upon the present
footing, all calculations of the par of exchange, as it is commonly
computed, upon the intrinsic value of the coins of other nations, must
be delusive and of no utility whatever.
For the sake of giving an example, however, here is the real par of the
two currencies, upon silver sterling coin of full weight.
One pound sterling should contain, as has been said, of fine silver
1718.7 troy grains, and contains 240 pence sterling: state, therefore,
the following proportion, and you will find how many pence sterling one
florin of Amsterdam banco should be worth.
1718.7 : 240 :: 156.71 : 21.883.
Thus 21.883 pence sterling is exactly the real par of an Amsterdam
florin banco, supposing sterling money to be silver, at the full weight.
The florin bank money being regulated upon the ducatoon, an old species
not now coined, the fineness of the silver was determined; and the
weight of the 200 ducatoons being determined also, this regulation
determined the weight of single pieces, and fixed the standard of the
florin banco, in weight and fineness.
The current money in Holland, coined by the state, is the florin of
200.21 aces fine, as we have seen in the last chapter of the preceding
book.
So soon as the state coined their current florins at 200.21 aces, it is
evident, that the ducatoon, which contains three times 211.91 aces, must
rise in its value. Accordingly, the piece which was in bank money, 3
florins, became 3 florins 3 stivers current money.
This difference is what is called the agio of the bank of Amsterdam.
From this it appears, that the advanced value of the bank money above
the current money of Holland, is not owing to the great credit of the
bank, as some imagine, but to the superior intrinsic value of the coin
upon which the standard of the bank money is fixed.
Let us next determine the exact difference between the bank and the
current money, which difference I shall call the _intrinsic agio_: for
this purpose state this proportion;
200.21 : 211.91 :: 100 : 105.84
From which it appears, that the bank money is 5.84 _per cent._
intrinsically better than the current money of Holland.
We have seen in the chapter referred to, in what a confused state the
Dutch coin is at present, and how it becomes a science to comprehend any
thing concerning it. For this reason it is, that the regular agio of the
bank money of Amsterdam is always supposed to be 5 _per cent._ Farther,
The ducatoon, upon which it is regulated, passes for 3 florins 3
stivers, which is just 5 _per cent._ better than 3 florins, at which it
was rated when the bank was established; but most of the coins which
circulate are light.
Those who conduct the affairs of the bank, have now lost sight of this
original coin, which is rarely found circulating, in considerable sums;
and they consider the florin according to its intrinsic worth of 211.91
aces of fine silver; and as the value of silver varies, they publish
regulations for receiving coin, such as Spanish dollars, French crowns,
&c. according as they find the proportion of their worth in bank money:
and compounding the value of gold with the value of silver, they make
the same regulations as to gold.
I have insisted too long already upon the subtilties of the variations
in the proportion between gold and silver, to take it up again in this
place. My intention is to explain the principles upon which this great
bank of deposit is established, and not to descend into a detail of the
mechanism of their adapting the variable coins of Europe to their own
standard.
I have said, that the sum of credit, written in the books of the bank,
is in proportion to the quantity of bank money necessary for circulating
the trade of Amsterdam.
Consequently, as this circulation increases, the demand for bank money
increases also.
Again; in proportion as the demand for bank money increases, the agio
rises; and on the other hand, as the demand for current money increases,
the agio falls.
Thus we saw in the last war, _ann._ 1760, 1761, 1762, that agio was
below 5 _per cent._ The reason was plain. The great circulation carried
on in Amsterdam was considerably directed towards the uses of the war.
_There_ bank money was of no use; coin only could serve the purpose.
Accordingly agio fell to —— _per cent._ and as gold was much more easily
transported than silver, that metal rose ¼ _per cent._ above the
ordinary proportion of 1 to 14½.
Demand regulates every thing; and this demand makes the agio fluctuate;
sometimes rising above, and sometimes falling bellow 5 _per cent._
------------------------------------------------------------------------
CHAP. XXXIX.
_Continuation of the same Subject; and concerning the Circulation of
Coin through the Bank of Amsterdam._
Hitherto we have represented this bank as a gulf, which is calculated to
swallow up the coin of Europe; without having pointed out any faculty of
throwing up a part of the treasure so secured, in case of an overcharge.
This has appeared a mystery to many, and a defect in the constitution of
the bank.
But when the principles upon which it is established come to be compared
with some branches of their administration, which are publicly known,
perhaps the mysterious part may be unravelled. And although I do not
pretend to give an entire satisfaction as to every minute particular, I
think I can shew how, and to what extent, the treasure may circulate, so
as to occasion no abuse, either from the hoarding it on one hand, or
from the dissipation of it, for the service of the state, on the other:
and if all these conjectures shall be found to hang together, and appear
consistent with principles, without being contradicted by any known
fact, then I may conclude, that such a system of banking as I describe,
is at least a possible supposition, whether it exactly coincides with
that of Amsterdam, or not. And who knows but my speculations may enable
some person of more knowlege and more sagacity than I am possessed of,
to render this curious operation of credit still more generally
understood than hitherto it has been.
I have shewn how the agio rises and falls, according to the demand for
bank money.
So long, therefore, as the agio does not fall below the difference
between the value of the two currencies, it is a proof that all the
credit writ in the books of the bank does not exceed the uses for it:
consequently, the coin locked up, which never can exceed the credit on
the transfer books, and which, were it not locked up, could be of no
more service than the credit itself, in circulating the trade of
Amsterdam, does not exceed its due proportion: consequently, it is not
hurtfully withdrawn from commerce; consequently, no abuse is implied
from the hoarding of it.
But let me suppose a case, which may happen; to wit, that for a certain
time, the trade of Amsterdam may demand a larger supply of credit in
bank, than is necessary upon an average. Will not this raise the agio?
No doubt. If the agio rises so high as to afford a premium upon carrying
coin to the bank, upon the footing of their own regulations, this will
augment the sum of bank credit; because the money so carried to the
bank, becomes incorporated with the bank stock; the value is writ in the
books of the bank; and when this is done, the coin is locked up for
ever.
If then it should happen, that the trade of Amsterdam should afterwards
diminish, so as to return to the ordinary standard, will not this
overcharge of credit depress the rate of bank money, and sink the agio
too much below the par of the intrinsic value of the two currencies?
To these difficulties I answer, like one who, being ignorant of facts,
which I never could get ascertained by any person in Holland to whom I
had access for information, and which remained hid from most people in
the deep arcana of Amsterdam politics, must have recourse to
conjectures, founded upon natural sagacity.
First then, The city of Amsterdam knows, from long experience, the rate
of demand for bank money; and it is not to be supposed, that upon any
sudden emergency, which may _heighten_ that demand for a time, they
should be such novices as to increase the credit upon their books so
far, as to run any risk of overstocking the market with it; especially
as, on such occasions, the deficiency of bank credit might be supplied
with coin, constantly to be found in the city of Amsterdam, as we shall
explain presently.
Farther, Who will say, that there does not reside a power in the
managers of this bank, to issue coin for the superfluous credit, in case
that, in spite of all precautions to prevent it, a redundancy of bank
credit should at any time be found upon their books?
It is very true, that no person, having credit in bank, can demand coin
for such credit; and as no demand of that sort can ever be made, it is
very natural to suppose, that a redundancy of coin and credit can never
be purged off.
During my stay in Holland, I was at great pains, to no purpose, to
discover whether ever the bank issued any part of their credit cash upon
any such occasions. Every one I conversed with was of opinion, that if
ever any coin had been taken from the treasure of the bank, it must have
been by authority of the states, for national purposes: a step conducted
with the greatest secrecy; and the matter of fact, I found, was
extremely doubtful. But this is nothing to the present purpose. That the
coin may be disposed of, I allow, though I do not believe it; but how is
the superfluous credit, writ in the books, to be disposed of? There lies
the difficulty.
The popular opinion is, that coin has been taken out for the service of
the state: the opinion of many intelligent men is quite contrary.
I am now to give my opinion, not only as to this point, but upon the
main question; and this not from information, but from conjecture; which
I shall humbly submit to the better judgment of my reader.
My opinion then is, 1_mo_, That every shilling written in the books of
the bank, is actually locked up, in coin, in the bank repositories.
2_do_, That although, by the regulations of the bank, no coin can be
issued to any person who demands it in consequence of his credit in
bank; yet I have not the least doubt, but _that both the credit written
in the books of the bank, and the cash in their repositories which
balances it, may suffer alternate augmentations and diminutions,
according to the greater or less demand for bank money_. If I can prove
this, all difficulties will be removed.
My reasons for being of this opinion are,
1_mo_, From principles, I must conclude, that if, upon any occasion
whatever, even when the smallest demand for bank money, and the greatest
demand for coin takes place, there was an impossibility of producing the
least diminution of bank credit, or of procuring any supply of the
metals from the bank, the consequence certainly would be felt, by an
extraordinary fall in the value of bank money; or which is the same
thing, in other words, by an extraordinary rise in the value of the
metals, when compared with bank money.
Now, this is a case which never happens. Variations upon the rate of
agio, of 2 or 3 _per cent._ perhaps more, are frequent and familiar. The
demands of trade, for coin or credit, are so fluctuating, that such
variations are unavoidable; but were there an overcharge of bank credit,
which no power could diminish, that overcharge would quickly be
perceived; because the fluctuations of the agio would entirely cease; as
the balance of a scale, nearly in equilibrio, ceases from a total
overcharge on one side.
2_do_, My second reason is founded upon a matter of fact, which I must
now apply.
There are upon the square before the town-house of Amsterdam, (the place
de Dam) between 10 and 11 in the morning, a number of cashiers, whose
business it is to buy and sell bank credit, for current coin. They
bargain with all those who have occasion either to buy or sell; and
according to the demand for specie, or bank credit, the agio rises or
sinks: and as these cashiers must constantly gain, whether they furnish
bank credit or current coin, since they are never the demanders in
either operation, it is commonly found, that there is in their favour
about 1⁄16 _per cent._ or perhaps ⅛ _per cent._ according to the
revolutions in the demand: that is to say, one who would first buy
specie, and then sell it, would lose ⅛, or perhaps but 1⁄16 upon his
operation.
From this circumstance of buying and selling of bank credit with coin,
and _vice versa_, I think I can resolve the mystery mentioned above,
viz. how the constant accumulation of coin in the bank of Amsterdam,
should never have the effect of depreciating their bank money, by
augmenting, beyond the demand for it, the quantity of their deposit, and
of the credit written in their books.
It is a matter of fact, that the bank lends both coin and credit to the
brokers, cashiers, or lombards, who are constantly found on the place de
Dam.
Whenever, therefore, the bank finds that agio falls too low, with
respect to the coin; and when, in consequence of that, the demand for
coin _increases_; then they lend _coin_ out of their repositories to the
brokers; and when it _rises_, they lend _credit_.
This coin the brokers dispose of to those who have bank money, and who
want to convert it into coin. They sell the coin for bank credit: the
purchaser writes off the transfer in favour of the broker, and he again
repays the value of the coin to the bank, by transferring the credit he
obtained for the coin, in favour of the bank.
This done, the bank may expunge this credit from their books; by which
means their deposit of coin is diminished, and also the sum of credit
which was found superfluous.
If, on the other hand, the circulation of the trade of the city should,
in a short time afterwards, begin to increase, those who have coin,
which in that case would not so well serve the uses of circulation as
the bank credit, come with it to the brokers, who sell them bank credit
for it; this coin the brokers deliver to the bank, which writes off the
credit lent to the broker, in favour of him who has paid his coin for
it.
This is, as far as I can guess, the nature of the circulation of the
coin in the bank of Amsterdam.
It is a curious method of preserving an exact proportion between the
coin in deposit, the credit written in their books of transfer, and the
demand for bank money.
The plan is quite consistent with principles, and checks exactly with
those matters of fact which are known to all the world. Whether the
operation be conducted exactly in the way I have represented it, or not,
is a matter of small consequence to us, who aim at nothing more than the
investigation _of the principles_ upon which such operations _may_ be
conducted.
When we compare this operation with those of the bank of circulation,
which we have already explained, we find a great analogy between them.
We have seen how the notes issued by banks of circulation increase and
diminish according to demand: and now we see how the same principle
operates in banks of deposit, which issue no coin on demand. In the
first case, the mass of securities, or coin of the bank, is diminished,
without the consent of the bank, by the act of their creditors; that is,
the holders of the notes. In the last case, the creditors, or persons
who have credit in bank, cannot, by their own act, diminish the quantity
of the coin deposited, nor of the credit written; but the bank itself,
by the help of those interposed persons, the brokers on the place de
Dam, is enabled to preserve an exact balance between bank money and the
demand for it; augmenting it as it is demanded, and diminishing it when
it is found to regorge.
From this I conclude, that the treasure of the bank of Amsterdam is not
near so great as some authors, from mere conjecture, have asserted.
The author of the Essay on commerce, reckons it at four hundred millions
of guilders; and the Amsterdam edition carries in the margin a
correction, which gives us to understand, that it amounts to between
eight and nine hundred millions. Davenant esteems it at 36 millions
sterling. Mr. Megens, an author of great judgment and sagacity, esteems
this treasure at no more than about 60 millions of guilders, or about
5,500,000_l._ sterling; a sum (says he) wherewith great things may be
done. Univers. Merchant, sect. 61. I agree entirely with him, that for
the ready-money demands of the trade of Amsterdam, that sum, constantly
in circulation, may go a great length.
What has misled most people in their estimation of this treasure, is the
appearance of a constant accumulation, without any restitution: but that
there is a constant egress, as well as ingress of coin to this bank, I
think I have rendred pretty evident.
Besides the permanent credit written in the books of transfer,
concerning which we have been speaking, the bank of Amsterdam receives,
in deposit, vast sums of coin every year, which are not incorporated
with the bank treasure, but remain in the bags in which they are
delivered, under the joint seals of the bank and of the person who
delivers them.
This operation comes next to be explained.
The trade of Holland draws a constant flux of coin and bullion into the
country; and that trade sends a constant flux out of it. The
establishment of the bank of Amsterdam renders the use of this coin and
bullion, upon many occasions, superfluous, as money.
It therefore remains as a commodity, the value of which rises according
to exigencies, or the demand for it.
When the precious metals come from Spain, Portugal, and other nations,
who owe a balance to the Dutch, they are lodged in the bank of Amsterdam
in the following manner.
The proprietors carry them to the bank in sacs composed of a determinate
number of pieces, and the sac must be of a determinate weight, according
to the regulations of the bank, from time to time; for which the bank
writes off credit in bank, at certain rates, according to the coin
lodged, to the account of the proprietor.
But as this coin is received, upon condition that it may be drawn out
again, so soon as the depositor shall demand it; instead of writing off
the _whole value_ upon the books of the bank, they only write off a
_certain part_, (suppose 90 _per cent._) and for the remaining 10 _per
cent._ they deliver what they call a _recipisse_, which is an obligation
by the bank to re-deliver, upon demand, the individual sacs, sealed with
the seals of the bank and of the depositor. This _recipisse_ is
transferable at the will of the person to whom it is delivered. Farther,
He who has put his coin so in deposit, becomes bound to pay to the bank
½, ¼, or ⅛_per cent._ every six months, according to the coin: that is,
upon gold ½ _per cent._ on pieces of eight and rix-dollars ¼; on
ducatoons ⅛ _per cent._ and in case he neglects so to do, then the coin
becomes consolidated with the treasure of the bank, and can no more be
drawn out, in virtue of the _recipisse_.
This being performed, the depositor may transfer, at will, all the 90
_per cent._ of his credit, in the course of his business; and so soon as
the _value of coin_ rises in the market, he must fill up his credit in
bank to the full value of the 90 _per cent._ and then presenting his
_recipisse_, he receives back his own individual coin, sealed with his
own seal, as when at first delivered.
If he finds that it is either inconvenient for him to fill up his
credit, or that he has no occasion for his coin, upon the rise in its
value, he may then sell his _recipisse_ to another, who has credit in
bank equal to the value of the deposit; and he, in virtue of the
_recipisse_ transferred to him, withdraws the coin, as the person might
have done who put it in deposit.
The _recipisse_ itself, which is what gives a right to the coin to any
one who is the proprietor of that paper, and who has credit in bank for
the sum contained in it, rises and sinks in its value, according to the
price of the coin to which it carries a right.
In this manner coin, which otherwise would be dead in a warehouse, is
made to circulate, in favour of the owner, during the deposit, remaining
at the same time always at his command; and the keeping of the coin
brings into the bank a small profit, but which, by constant
accumulation, becomes considerable.
I have said above, that the bank of Amsterdam puts forth, from time to
time, what regulations they think fit, as to the rate at which they
receive the different species of coin. These regulations are formed
according to the fluctuation of the value of the metals. When silver
rises above the proportion it had before, with respect to gold, then the
silver species is received at a higher rate than formerly. When gold
rises in proportion to silver, then the gold coins are received at a
higher rate than formerly.
This regulation produces the same effect as that, which I formerly
recommended in the third book, would do, in fixing a standard for the
unit of the money of Great Britain, according to the mean proportion of
the metals: and it was for this reason, that [Book III. part I. chap.
1.] I asserted the bank money of Amsterdam to be an invariable unit,
which the art of man had invented; that it stood like a rock in the sea,
immoveable by the fluctuating proportion between the metals.
It is no objection against this, to allege the variation of the agio,
and the fluctuation of the value of bank money according to demand.
These variations ought to be referred to the coin, not to the bank
money: the bank money is to be considered as fixed, because it has all
the characters of invariability.
If, indeed, the affairs of the bank came to be ill administred, and that
the credit written in the bank were allowed to swell so far beyond the
demand for it, as to sink the value of bank money so far below the rate
of coin as to make it impossible to recover itself; then I should allow
that the bank money was no longer an invariable standard: but in this
case, I should consider the bank as in a kind of political disease,
because it would then be withdrawn from under the influence of its own
principles, which hitherto has never been the case.
It has been imagined by many, that the treasure of the bank of Amsterdam
has been, upon certain occasions, made use of for the public service.
This is a conjecture merely; and perhaps it has been owing to the
opinion which commonly prevails, that the treasure far exceeds all the
uses which it can serve for. But as I am persuaded, 1_mo_, That this
opinion is void of all foundation; 2_do_, That the treasure never can
exceed the credits written; and, 3_tio_, That the credits never can
exceed the uses those merchants have for them: so I am of opinion, that
a value, in coin, to the full extent of those credits, actually exists
in the repositories of the bank; because if I should suppose the
contrary, it would imply a notorious infidelity in the bank
administration: an infidelity, which, if ever it should be discovered,
would overturn the whole credit of the bank, and, at one stroke, destroy
the whole trade of that city. Now the use of three or four millions
sterling, to the states of Holland, which they can procure when they
will, at a very moderate interest, is not an object in the eyes of that
sagacious government, sufficient to engage them to tamper with the bank
treasure: and the rather, that were they driven to the necessity of
having recourse to the bank, I make not the least doubt but that so
great a company would be of more service to the state in writing off
upon an occasion a _temporary, untransferable credit at interest_, which
might afterwards be expunged, in order to procure coin within the
country, than by delivering the coin corresponding to the credit of
private merchants, which they must look upon as a most sacred deposit.
If we compare the credit of the bank of Amsterdam, with the credit of
the bank of England, we shall find the first infinitely inferior to the
latter as to extent, though not one bit inferior with respect to the
solidity of it.
The extent of the credit of the bank of Amsterdam is limited to the sum
of the credits written in their books, either in permanent transfer, as
I shall call it, or in credit on cash deposited upon _recipisse_. All
this credit put together, cannot extend beyond the limits of the
circulation of the city of Amsterdam, in their domestic dealings, and in
their exchange business; which last is indeed very great.
But the credit of the bank of England is equal (in a manner) to all the
circulation and exchange business of London, and all the taxes paid in
Great Britain. This bank, in circulating its paper, is not limited to
the weight of coin in England. The whole interest of the national debt,
and expence of the state, may be paid in the paper of the bank, and be
perfectly well secured, although their treasure in coin may seldom
amount to above four millions sterling.
We must however allow, that banks of circulation, when ill conducted,
are liable to great abuse; as has been abundantly explained in treating
of the Missisippi. But how is abuse to be prevented, while men conduct?
And disasters may happen to a bank of deposit, to which the other is not
so much exposed. May not the treasure of the bank of Amsterdam be lent
out on bad security? May not the state lay hold of it? May not an
earthquake swallow up the stadthouse? May not the sea break in, and
demolish it? May not another invader, like the late King of France, in
1672, be more successful, and carry off the bank?
These are abuses and calamities to which the bank of Amsterdam is
exposed; and from many of which the bank of England is in a great
measure protected.
Besides the banks I have mentioned, not so much with a view to give an
historical account of their operations, as to illustrate the principles
on which they are established, there are many others in Europe of great
and extensive credit; such as that of Hamburg, Venice, Genoa (until the
state spent the treasure deposited) Nuremberg, &c. Every one of these
participate more of the nature of that of Amsterdam, than of those in
Great Britain. They are more calculated for preserving the standard of
their bank money, against the adulterations of coin, and for providing a
fund of cash, transferable in bank credit, than for the assistance of
government, or the melting down of solid property, which are the great
advantages peculiar to _banks of circulation_.
These last are also infinitely more lucrative to the bankers than those
of deposit, from the interest they draw from credits given, discount of
bills, and loans to government.
The profits on the bank of Amsterdam are very trifling. They are
confined to the small emoluments of 2 stivers for every transfer;
besides the interest they draw from the brokers on the place _de Dam_,
for the coin and credit they furnish them with; and, in the last place,
the ½, ¼, or ⅛ _per cent._ every six months, for the coin deposited, in
order to be afterwards drawn out. But on the other hand, they are freed
from the enormous expence of providing coin for the payment of foreign
balances, and from the great detail of business which the circulation of
paper implies.
END OF THE SECOND PART.
------------------------------------------------------------------------
------------------------------------------------------------------------
AN
INQUIRY
INTO THE
PRINCIPLES OF POLITICAL OECONOMY.
------------------------------------------------------------------------
BOOK IV. | OF CREDIT AND DEBTS.
PART III.
OF EXCHANGE.
------------------------------------------------------------------------
CHAP. I.
_Of the first Principles of Exchange._
Having ended what I had to say of banks, in which most of the principles
of private credit have been sufficiently deduced, I now proceed to the
doctrine of exchange, which is the principal operation of mercantile
credit.
The security which merchants commonly take from one another when they
circulate their business, is a bill of exchange, or a note of hand:
these are looked upon as payment. When they give credit to one another
in account, or otherwise, the cause of confidence is of a mixed nature;
established partly upon the security of their effects, partly on the
capacity, integrity, and good fortune, of the person to whom the credit
is given.
No man but a merchant has any idea of the extent and nature of this kind
of credit. It is a thing to be felt, but cannot be reduced to
principles; and merchants themselves can lay down no certain rules
concerning it. It is an operation which totally depends upon their own
sagacity.
But when they deal by bills of exchange, the case is very different. The
punctuality of acquitting those obligations is essential to commerce;
and no sooner is a merchant’s accepted bill protested, than he is
considered as a bankrupt. For this reason, the laws of most nations have
given very extraordinary privileges to bills of exchange. The security
of trade is essential to every society; and were the claims of merchants
to linger under the formalities of courts of law, when liquidated by
bills of exchange, faith, confidence, and punctuality, would quickly
disappear; and the great engine of commerce would be totally destroyed.
A regular bill of exchange is a mercantile contract, in which four
persons are concerned, viz. 1. The drawer, who receives the value: 2.
His debtor in a distant place, upon whom the bill is drawn, and who must
accept and pay it: 3. The person who gives value for the bill, to whose
order it is to be paid: and 4. The person to whom it is ordered to be
paid, creditor to the third.
By this operation, reciprocal debts, due in two distant parts, are paid
by a sort of transfer, or permutation of debtors and creditors.
(A) in London, is creditor to (B) in Paris, value 100_l._ (C) again in
London, is debtor to (D) in Paris for a like sum. By the operation of
the bill of exchange, the London creditor is paid by the London debtor,
and the Paris creditor is paid by the Paris debtor; consequently, the
two debts are paid, and no money is sent from London to Paris, nor from
Paris to London.
In this example, (A) is the drawer, (B) is the accepter, (C) is the
purchaser of the bill, and (D) receives the money. Two persons here
receive the money, (A) and (D), and two pay the money, (B) and (C);
which is just what must be done when two debtors and two creditors clear
accounts.
This is the plain principle of a bill of exchange. From which it
appears, that reciprocal and equal debts only can be acquitted by them.
When it therefore happens, that the reciprocal debts of London and Paris
(to use the same example) are not equal, there arises a balance on one
side. Suppose London to owe Paris a balance, value 100_l._ How can this
be paid? I answer, that it may either be done with or without the
intervention of a bill.
With a bill, if an exchanger, finding a demand for a bill upon Paris,
for the value of 100_l._ when Paris owes no more to London, sends
100_l._ to his correspondent at Paris in coin, at the expence, I
suppose, of 1_l._ and then, having become creditor on Paris, he can give
a bill for the value of 100_l._ upon his being repaid his expence, and
paid for his risk and trouble.
Or it may be paid without a bill, if the London debtor sends the coin
himself to his Paris creditor, without employing an exchanger.
This last example shews of what little use bills are in the payment of
balances. As far as the debts are equal, nothing can be more useful than
bills of exchange; but the more they are useful in this easy way of
business, the less profit there is to any person to make a trade of
exchange, when he is not himself concerned, either as debtor or
creditor.
When merchants have occasion to draw and remit bills for the liquidation
of their own debts, active and passive, in distant parts, they meet upon
change; where, to pursue the former example, the creditors upon Paris,
when they want money for bills, look out for those who are debtors to
it. The debtors to Paris again, when they want bills for money, seek for
those who are creditors upon it. This is a representation of what we
have frequently called the money market, in which the _demand_ is for
_money_, or for _bills_.
This market is constantly attended by brokers, who relieve the merchant
of the trouble of searching for those he wants. To the broker every one
communicates his wants, so far as he finds it prudent; and by going
about among all the merchants, the broker discovers the side upon which
the greater demand lies, for money, or for bills.
We have often observed, that he who is the demander in any bargain, has
constantly the disadvantage in dealing with him of whom he demands. This
is no where so much the case as in exchange, and renders secrecy very
essential to individuals among the merchants. If the London merchants
want to pay their debts to Paris, when there is a balance against
London, it is their interest to conceal their debts, and especially the
necessity they may be under to pay them; from the fear that those who
are creditors upon Paris would demand too high a price for the exchange
over and above par.
On the other hand, those who are creditors upon Paris, when Paris owes a
balance to London, are as careful in concealing what is owing to them by
Paris, from the fear that those who are debtors to Paris would avail
themselves of the competition among the Paris creditors, in order to
obtain bills for their money, below the value of them, when at par. A
creditor upon Paris, who is greatly pressed for money at London, will
willingly abate something of his debt, in order to get one who will give
him money for it.
It is not my intention to dip into the intricacies of exchange: all
intricacies must here be banished; and instead of technical terms, which
are very well adapted for expressing them, recourse must be had to plain
language, for pointing out the simple operations of this trade. It is by
this method that principles must be deduced, and from principles we
shall draw the consequences which may be derived from them.
From the operation carried on among merchants upon Change, which we have
been describing, we may discover the consequence of their separate and
jarring interests. They are constantly interested in the state of the
balance. Those who are creditors on Paris, fear a balance due to London;
those who are debtors to Paris, dread a balance due to Paris. The
interest of the first is to dissemble what they fear; that of the last,
to exaggerate what they wish. The brokers are those who determine the
course of the day: and the most intelligent merchants are those who
dispatch their business before the fact is known.
Now I ask, how trade, in general, is interested in the question, who
shall outwit, and who shall be outwitted, in this complicated operation
of exchange among merchants?
The interest of trade and of the nation is principally concerned in the
proper method of paying and receiving the balances. It is also concerned
in preserving a just equality of profit and loss among all the
merchants, relative to the real state of the balance. Unequal
competition among men engaged in the same pursuit, constantly draws
along with it bad consequences to the general undertaking, as has often
been observed; and secrecy in trade will be found, upon examination, to
be much more useful to merchants in their private capacity, than to the
trade they are carrying on.
Merchants, we have said, in speaking of the bank of England, endeavour
to simplify their business as much as possible; and commit to brokers
many operations which require no peculiar talents to execute. This of
exchange is of such a nature that it is hardly possible for a merchant
to carry on the business of his bills, without their assistance, upon
many occasions. When merchants come upon Change, they are so full of
fears and jealousies, that they will not open themselves to one another,
lest they should discover what they want to conceal. The broker is a
confidential man, in some degree, between parties, and brings them
together.
Besides the merchants, who circulate among themselves their reciprocal
debts and credits, arising from their importation and exportation of
goods, there is another set of merchants who deal in exchange; which is
the importation and exportation of money and bills.
Were there never any balance on the trade of nations, exchangers and
brokers would find little employment: reciprocal and equal debts would
easily be transacted openly between the parties themselves. No man
feigns and dissembles, except when he thinks he has an interest in so
doing.
But when balances come to be paid, exchange becomes intricate; and
merchants are so much employed in particular branches of business, that
they are obliged to leave the liquidation of their debts to a particular
set of men, who make it turn out to the best advantage to themselves.
Whenever a balance is to be paid, that payment costs, as we have seen,
an additional expence to those of the place who owe it, over and above
the value of the debt.
If, therefore, this expence be a loss to the trading man, he must either
be repaid this loss by those whom he serves, that is, by the nation; or
the trade he carries on will become less profitable.
Every one will agree, I believe, that the expence of high exchange upon
paying a balance, is a loss to a people, no way to be compensated by the
advantages they reap from enriching the few individuals among them, who
gain by contriving methods to pay it off: and if an argument is
necessary to prove this proposition, it may be drawn from this
principle, to wit, whatever renders the profit upon trade precarious or
uncertain, is a loss to trade in general: this loss is a consequence of
high exchange; and although a profit does result from it upon one branch
of trade, the exchange business, yet that cannot compensate the loss
upon every other.
We may, therefore, here repeat what we have said above, that the more
difficulty is found in paying a balance, the greater is the loss to the
nation.
This being admitted, I shall here enumerate all the difficulties which
occur in paying of balances. Most of them have been already mentioned
from their relation to subjects already discussed; and could it be
supposed, that every reader has retained the whole chain of reasoning
already gone through, a repetition in this place would be superfluous:
but as that cannot be expected, I shall, in as short and distinct a
manner as possible, recapitulate, under four articles, what I hope will
be sufficient to refresh the memory upon each of them.
1_mo_, The first difficulty which occurs in paying a balance, is to
determine exactly the true and intrinsic value of the metals or coin in
which it is to be paid; that is to say, the real par.
2_do_, How to remove the domestic inconveniences which occur in paying
with the metals or coin.
3_tio_, How to prevent the price of exchange from operating upon the
whole mass of reciprocal payments, instead of affecting only the
balance.
The remedies and palliatives for these three inconveniencies once
discovered, comes the last question, viz. How, when other expedients
prove ineffectual for the payment of a balance, the same may be paid by
the means of credit, without the intervention of coin; and who are those
who should conduct that operation.
------------------------------------------------------------------------
CHAP. II.
_How to determine exactly the true and intrinsic value of the Metals,
Coin, or Money, in which a Balance to foreign Nations is to be paid._
This first question regards the whole mass of reciprocal payments, as
well as that of the balance.
Every payment to be made of a determinate and fixed value; that is to
say, of a liquidated debt, must be paid in a value equally determinate
in its nature.
This I suppose to be the case, whether payment be made in the precious
metals unmanufactured, bullion, or in a nation’s coin, or in
denominations of money of account. All payment in merchandize, except
bullion, must suffer conversions of value before the debts can be
liquidated.
Money of accompt, which is what we understand by denominations, we have
defined to be a scale of equal parts, calculated to determine the value
of things, relatively to one another. It must, therefore, be by the
money of accompt of different nations, that the value of bullion and of
coin can be determined.
When coin is introduced, the denominations of money are realized in a
determinate quantity of the precious metals, and the fabrication of the
bullion into coin, raises the value of that commodity, bullion, like the
manufacturing of every other natural production.
When coin, therefore, is employed in paying sums according to the legal
denomination which it carries, it is money, not merchandize; but when it
is given at any other rate than its denomination, it is merchandize, not
money.
In the third book, we have shewn how utterly impossible it is to realize
with exactness, the denominations of money of accompt, in the metals
which are constantly varying in their value, and exposed to waste in
circulation.
We have shewn, by many examples, how, in fact, the value of the pound
sterling has been subject to great vicissitudes of late, from the great
disorder of the coin.
The coin of France is, indeed, upon a better footing in point of
uniformity of weight, than ours; and the proportion of the metals in it
comes nearer their present value in the market: but then as oft as the
balance turns against France, the high imposition upon her coinage,
exposes the coin to great fluctuations of value, when compared with
bullion in the Paris market. This is also to be ascribed to the
imperfection of the metals when used as money, while they are
merchandize at the same time.
This being the case, the way to calculate the real par of exchange
between nations, who have in common no determinate and invariable money,
exclusive of coin, is to consider fine gold and silver as the next best
standard.
This is a merchandize which never varies in its quality. Fine gold is
always the same in every mass; and weight for weight, there is no
difference in its value or quality any where.
This standard being once adopted, the calculation of the real par
becomes an easy operation to those who know the course of the bullion
market in the two places exchanging.
If, by the exportation of all the heavy coin of London, bills must be
paid in a worn out currency, the rise in the price of gold in their
market, above mint price, will mark pretty nearly how far it is light.
If, on the other hand, the wars of France, or an unfavourable balance
upon her trade, shall oblige her to export her coin, that operation will
_sink_ the value of it, or _raise_ the price of bullion, which ever way
you choose to express it.
It is not here a proper place to resume the question, which of the two
expressions is the most proper: we are here considering the value of the
bullion as what is fixed, because it answers the purpose. But whether we
say that bullion _rises_ in the markets of Paris and London; or that the
value of their currencies _sink_, though from very different causes, the
calculation of the real par will proceed with equal accuracy. An example
will illustrate this.
When _fine_ gold is at the lowest price to which it can ever fall at
Paris, that is to say, at the mint price, it is worth 740 livres 9 sols,
or 740.45 livres _per_ mark, in decimals, for the ease of calculation.
The mark contains eight ounces Paris weight.
Were the ounces of Paris equal to those of troy weight, ⅛ of this sum,
or 92.5562 livres, would be the value of that ounce by which gold is
sold at London.
But the Paris ounce is about 1½ _per cent._ lighter than the troy ounce;
and the exact proportion between them is unknown, from the confusion of
weights, and the want of a fixed standard in England.
By the best calculation I have been able to make, a Paris ounce should
contain 473 grains troy, which makes the proportion between the two
ounces to be as 473 is to 480, which is the number of grains in the troy
ounce.
Gold bullion at Paris is regulated by the mark _fine_, at London by the
ounce _standard_.
When standard gold bullion is at the lowest price it can be at London,
it is worth the mint price, or 3_l._ 17_s._ 10½_d._ _per_ troy ounce,
which, expressed in decimals, is 3.8937_l._ sterling. Standard is to
fine, as 11 is to 12; consequently, the ounce fine is 4.2476_l._
sterling: and if the Paris ounce of _fine_ bullion be worth, as has been
said, 92.5562 livres, the ounce troy, according to the above proportion,
will be worth 93.926 livres. Divide then the livres by the sterling
money, and the quotient will give you the real par of exchange of the
pound sterling, while bullion remains at that value in Paris and in
London, viz. 4.2476⁄93.926 = 22.112 livres for the pound, or 32.56_d._
sterling for the French crown of 3 livres.
Gold bullion never can rise in the Paris market, at least all the last
war it never _did_ rise, above the value of the coin; that is, to 801.6
livres the mark fine, or 100.2 livres _per_ ounce Paris, and 101.7
livres the troy ounce.
How high the price of gold bullion may rise at London no man can say;
but the highest it rose to, during the last war, was, I believe, 4_l._
0_s._ 8_d._ _per_ ounce standard, or to 4.3999_l._ sterling _per_ ounce
fine. By this divide the value of the ounce troy fine in French livres,
the real par at this rate of the metals in both cities will be
4.3999⁄101.7 = 23.11 livres for the pound sterling, or 31.155 pence
sterling for the French crown of 3 livres. But suppose two cases which
may happen, viz. 1. That gold bullion at Paris should be at the price of
coin, while at London it may be at mint price: or, 2. That at Paris it
may be at mint price, when at London it is at 4_l._ 0_s._ 8_d._ what
will then the real par of exchange be?
I answer, that on the first supposition, it will be one pound sterling,
equal to 23.939 livres, and the crown of 3 livres equal to 30.076 pence
sterling. In the other, equal to 21.34 livres for the pound sterling,
and for the crown of 3 livres 33.728. A difference of no less than 8.9
_per cent._
Is it not evident that these variations _must_ occur in the exchange
between London and Paris? And is it not also plain, that they proceed
from the fluctuation of the price of bullion, not from exchange?
We have, I think, demonstrated, in the third book, that a wrong balance
upon the French trade raises bullion to the price of coin; and that a
right balance brings it down to mint price. The price of coinage is
above 8 _per cent._ So that 8 _per cent._ of fluctuation in the price of
bullion is easily accounted for in the Paris market, without combining
the variations in the English market.
In London, where no coinage is paid, were all the coin of full weight,
and exportation free, coin and standard bullion would constantly stand
at the same price: but when the heavy coin is exported, and the currency
becomes light by the old remaining in circulation, the price of bullion
rises in proportion.
Is it surprizing that, at London, gold in bullion should be worth as
much as gold of the same standard in guineas, weight for weight? It is
worth as much at the mint, why should it not be worth as much at market?
Any man may offer to pay _for the ounce_ of all the guineas coined by
Charles II. James II. and William III. now in circulation, the highest
market price that ever was given for standard gold bullion in London,
and gain by the bargain.
This, I hope, will be sufficient to satisfy any body that there is a
mistake in ascribing the high price paid for the French crown in the
London exchange, to a wrong balance upon the trade of England with
France.
From this new light in which I have placed the question, I hope the
arguments used in the 16th chapter of the first part of the third book,
will acquire an additional force; and that thereby the eyes of this
nation may be opened with regard to the interests of the French trade; a
point, I should think, of the highest concern.
To calculate, as every body does, the par of the French crown, either by
the gold or the silver in the English _standard_ coin, when no such
_standard_ coin exists; and to state all that is given for the crown
above 29½_d._ if you reckon by the silver, or 30¼_d._ if you reckon by
the gold, for the price of a wrong balance, is an error which may lead
to the most fatal consequences.
If government should think fit to impose, in their own mint, a coinage,
equal to that of France, and make all their coin of equal weight, and at
the due proportion, it will take off all the loss we suffer by paying
coinage to France, which we at present impute to the exchange, while she
pays none to us. But then it will occasion nearly the same fluctuations
upon the real par of exchange as at present; only from another cause on
the side of Great Britain. At present our exchange becomes favourable
from the weight of our own currency, and the balance against France upon
her trade; which, in Paris, raises the price of the bullion with which
we pay our French debts. On the other hand, our exchange becomes
unfavourable from the lightness of our own currency, from the coinage we
pay to France, and balance against us; which last carries off all our
new guineas; and in the Paris market, sinks the value of that bullion in
which we pay our French debts.
Were matters put upon a right footing, we should gain from France the
price of our coinage, when our balance is favourable, and pay coinage to
France when their balance is favourable; instead of seeing our exchange
turn more in our favour, only from the additional weight of the coin in
which we pay.
If French coinage should appear too high a price for the interest of
other branches of British trade, a question I shall not here determine,
let us impose at least as much as to keep our guineas out of the melting
pot, and banish all the old coin which throws us into such confusion.
What has been said is undoubtedly too much upon this subject for the
generality of readers. The number of those who can go through a chapter
like this with pleasure is very small. But if the idea I have been
endeavouring to communicate, be found just by one man of capacity, whose
opinion shall have weight in the deliberations of Great Britain, the
consequences may be great to this nation; and this consideration will, I
hope, plead my excuse.
I shall now set this question in another point of view, from which the
stress of my arguments will be felt, and all intricate combinations will
be laid aside.
Does not the price of exchange, or what is given above the par, proceed
from the expence of sending the metals from one place to the other, the
insurance of them, and the exchanger’s profit? If this be true, which I
believe no body will deny, must not what is paid for the bill, over and
above these three articles, be considered as the real par, relative to
exchange? Now does the price of the bullion which the exchanger pays in
his own market, or the price he gets for that bullion in the market to
which he sends it, at all enter into the account of the transportation,
risk, and profit, which the exchanger has on the operation? Certainly
not. May there not be a very great difference between the buying and
selling the very same bullion in different markets at one time and
another? Ought we not to charge that to some other accompt than to the
price of exchange, which is confined to the expence of transporting _the
balance only_, and when two objects totally different are included under
the same term, does it not tend to perplex our notions concerning them?
The great variation in the price of bullion in France, for example, and
the expence of procuring it, proceeds from three causes. The first is,
the coinage imposed in France, while none is imposed in England. What,
therefore, is paid upon this account, is profit to France, and loss to
England.
The second cause of variation, is the debasement of the value of the
pound sterling, when the heavy gold has been sent abroad. That loss
affects the nation, and every man in England, in the quality of creditor
for sums specified in pounds sterling, to the profit of all debtors.
The third cause of variation, is from the great expence exchangers are
put to, in procuring the metals from other countries, when they cannot
be got at home: the consequence of this shall be explained in a
succeeding chapter.
As all these causes are combined in the exchange upon bills when they
come to market, I think it is proper to analize them, before the
doctrine we are upon can be distinctly understood.
I shall therefore conclude my chapter with this proposition:
That the best method of determining exactly the true and intrinsic value
of the metals, coin, or money, in which the balance due to or from a
foreign nation is to be paid, is to compare the respective value of fine
bullion with the respective denominations of the coin in the one and the
other; and to state the difference as the price paid for the
exchange[20].
Footnote 20:
There occurs another considerable difficulty to be removed, before the
real par of exchange can be exactly determined from the price of
bullion, to wit, the uncertainty of weights, and the multiplicity of
them.
Every nation in Europe has a different weight, I might almost say
every city. This has proceeded, in a great measure, from the
inaccuracy with which they have been made formerly. I think it is
highly probable, that many, at least, of the principal weights in
Europe, have derived their origin from the same standard; although
they are now considerably different. Those I am best acquainted with
are the following, of which I shall here set down a short table,
reduced to troy grains, according to the best calculation I have been
able to make.
One ounce troy contains 480 troy grains.
One ounce Paris, or _poids de marc_, 473
One ounce Holland troes 473.27
One ounce Colonia 449.33
These are the weights used in the mints of England, France, Holland,
and Germany.
If therefore we should call the troy ounce 100, the proportion of the
rest will be as follows:
Troy 100
Paris 98.541
Holland 98.597
Colonia 93.61
I have chosen to reduce to ounces; because it is the denomination in
which the proportion of weights is best preserved.
These ounces I apprehend to have been originally taken from the old
Roman pound, which was the weight adopted by the Emperor Charles the
Great, who applied himself much to the establishing a general standard
of weights in his dominions.
In the examples I have given, we see how the Colonia ounce deviates
more than any other from the average on the whole.
This ounce is very near equal to the old Saxon ounce, established in
the English mint at the Norman conquest, and there preserved, until
Henry VIII. substituted in its place, the troy weight. This
circumstance makes it probable that the Saxon ounce came originally
from Charles the Great, who first conquered the Saxon nation, and drew
them from a state of absolute barbarity. The rude manners of the
Saxons may have occasioned this great deviation.
The difference, therefore, in those ounces, I ascribe to the
progressive error of those who have made weights, and from the neglect
of preserving a proper standard.
The best remedy for this inconvenience, would be, for any one mint to
form a weight, _ad libitum_, and to send a most accurate copy of it to
every mint in Europe: to mention, at the same time, the exact
proportion between the weight sent, and that observed at their own
mint: to beg of the other mints an equal communication of the
proportion between the weight sent, and their several standards: and
last of all, to publish in the news-papers of all commercial towns,
every market day, as is done at Amsterdam, the price of _fine_ gold
and silver, according to this new weight made for the purpose. This
weight may be called the mint-weight of Europe; and from the universal
utility which would follow upon such a regulation, it probably might
be followed: were this to happen, it might be a step towards
establishing an universal conformity of weights every where.
While matters stand on the present footing, it is necessary to be
informed of three particulars. First, Of the proportion of the
different mint weights. Secondly, Of the regulations by which the coin
is made. And lastly, Of the exactness of the mints in following the
regulation. Every mistake in any one of these three articles, is an
impediment to the just determination of the real par.
I acknowledge that, in fact, exchange business goes on smoothly,
notwithstanding all the difficulties we have been enumerating. It may
therefore be asked, in what would consist the great advantage of so
scrupulous a nicety?
My answer is, that exchange business will always go smoothly on, as
long as exchangers gain, and that trade is not interrupted.
But trading men consider their own interest only; and I am configuring
the interest of an intelligent state, which wants to promote the good
of the whole community, without occasioning any hurt to the interest
of individuals.
------------------------------------------------------------------------
CHAP. III.
_How to remove the inconveniences which occur in paying Balances with
the Metals or Coin of a Nation._
The inconveniences which occur when balances are to be paid in bullion
or coin are these:
First, The want of secure and ready transportation, from the
obstructions government throws in the way to prevent it.
Secondly, The difficulty of procuring the metals abroad when they are
not to be found at home.
When we speak here of balances to be paid from one country to another,
we understand, that the general amount of the whole payments to be made
to the world, exceeds the sum of all that is reciprocally due from it.
So far as a balance due to one country is compensated with a balance due
by another, they may be mutually discharged by bills of exchange,
according to the principles already laid down. All compensations being
made by bills drawn for reciprocal debts, we must here suppose a balance
due by the country whose interest we are considering. This, like debts
between private people, must either be paid in intrinsic value, or by
security for it; that is, by contracting a permanent debt bearing
interest. The first is the question here before us; the second will be
examined in the succeeding chapter.
The first difficulty mentioned, to wit, the want of secure and ready
transportation of the metals, proceeds in a great measure from the
obstruction government throws in the way, to prevent the exportation of
them. To remove which difficulty, it is proper to shew how far it is the
interest of government to obstruct, how far to accelerate the
transportation of the metals.
We have said that it is the advantage of every state, in point of trade,
to have balances paid with the least expence. If then we suppose that it
is either necessary or expedient that this balance should be paid in the
metals, government, in that case, should facilitate by every method the
sending them off in the cheapest and securest way.
But since governments do not follow that rule, we must examine the
reasons which engage them to prefer a contrary conduct.
The principal, the most general, and most rational objection against the
exportation of the metals, is, that when it is permitted, without
restriction, it engages the people, when they go to foreign markets for
articles of importation, to run to the coin, instead of carrying thither
the product and manufactures of the country. From which a consequence is
drawn, that as long as coin and bullion are fairly allowed to be
exported, the rich inhabitants will employ them for the purchase of
foreign commodities, to the hurt of domestic industry.
This is an objection of great weight, relative to the situation of many
nations. The Spaniards and Portuguese feel it severely. Many individuals
there are very rich; the numerous classes of the people are either lazy
or not properly bred to industry. In that situation the alternative to
government is very disagreeable. Either the rich must be deprived of
every enjoyment with which their industrious neighbours alone can supply
them, until, by very slow degrees, the lowest classes of their
countrymen can be engaged to change their way of living, and be inspired
with a spirit of industry; or they must be allowed to gratify the
desires which riches create, at the expence of the nation’s treasure,
and the improvement of their country.
From this alternative we discover the principle which directs the
conduct of a statesman under such circumstances, viz.
To forbid the importation of every foreign manufacture whatsoever; to
submit to the hardships necessarily implied in the circumstances of the
nation; and to pay freely what balance may be owing upon natural produce
imported for the uses of subsistence, or manufacture.
This is a plan more rational and more easily executed, than a general
prohibition to export the metals; because with good regulations,
properly executed, you may prevent the importation of manufactures; but
it is hardly possible to prevent the exportation of the metals necessary
to pay for what you have bought from strangers, by the permission of
government: and on the other hand, suppose you do effectually prevent
the exportation of the metals, the consequence will be, to put an end to
all foreign trade even in natural produce. What nation will trade with
another who can pay only by barter? All credit will then be cut off; for
who will exchange by bills, with a place which cannot pay, either in
their own currency, or with the metals, the debts which they
reciprocally owe?
The maxim therefore, here, is to prevent the contracting of debts with
strangers; but when you allow them to be contracted, to facilitate the
payment of them.
This reasoning is only calculated to direct a statesman who finds
himself at the head of a rich luxurious nobility, and an idle or ill
instructed common people, surrounded by industrious neighbours, whose
assistance may be necessary upon many occasions, to provide subsistence,
or the materials of manufacture, to his people; and this while he is
forming a scheme of introducing industry at home, as a basis for
afterwards establishing a proper foreign commerce.
But in this subject combinations are infinite, and the smallest change
of circumstances throws the decision of a question on a different
principle.
I will not therefore say, that in every case which can be supposed,
certain restrictions upon the exportation of bullion or coin are
contrary to good policy. This proposition I confine to the flourishing
trading nations of our own time.
To set this matter in a fair light, and as an exercise upon principles,
I shall borrow two combinations, one from history, and another from a
recent example in France, in which a clog upon the exportation of the
metals and coin were very politically laid on.
We learn from the history of Henry VII. of England, a sagacious Prince,
that he established very severe laws against the exportation of bullion;
and obliged the merchants who imported foreign commodities into his
dominions, to invest their returns in the natural produce of England,
which at that time consisted principally in wool and in grain.
The circumstances of the times in which that Prince lived, must
therefore be examined, before we can justly find fault with this step of
his political oeconomy.
In Henry the VIIth’s time, the foreign trade of England was entirely in
the hands of foreigners, and almost every elegant manufacture came from
abroad.
Under such circumstances, is it not plain, that the prohibition of the
exportation of bullion and coin was only a compulsion, concomitant with
other regulations, to oblige foreign merchants, residing in his kingdom,
to buy up the superfluity of the English natural produce of wool and
grain? Had not the King taken those measures, the whole money of the
nation would have been exported; the superfluous natural produce of
England would have lain upon hand; the abundance of these would have
brought their price below the value of the subsistence of those who
produced them; agriculture would have been abandoned; and the nation
would have been undone.
I allow that nothing is so absurd as a desire to consume foreign
productions, and to forbid the exportation of the price of them. I also
allow, that every restraint laid upon exporting silver and gold, falls
upon the consumer of foreign goods, and obliges him to pay the dearer
for them; but this additional expence to the consumer, does not augment
the mass of foreign debts. The debt due abroad will constantly be paid
with the same quantity of coin, whether the exportation of it be allowed
or forbidden; because the loss of those who pay the balance arises from
the risk of confiscation of the money they want to export against law;
or from the high exchange they are obliged to pay to those who take that
risk upon themselves. In both cases, the additional expence they are put
to remains in the country, and is repaid them by the consumers;
consequently, can never occasion one farthing more to be exported.
Prohibitions, therefore, upon the exportation of specie, are not in
every case so absurd as they appear at first sight. It is very certain
that no body gives money for nothing; consequently, a state may rest
assured that the proprietors of the specie, their subjects, will take
sufficient care not to make a present of it to foreigners. The
intention, therefore, of such prohibitions, is not to prevent the
payment of what people owe; but to prevent that payment from being made
in coin or bullion; and also to discourage the buying of such foreign
commodities as must be paid in specie, preferably to others which may be
paid for with the returns of home produce.
When a statesman, therefore, finds the balance of trade, upon the main,
favourable to the country he governs, he need give himself no trouble
about the exportation of the specie, from this single principle, to wit,
that he is sure it is not given for nothing. But when the balance turns
against them, in the regular course of business, not from a temporary
cause, then he may lay restraints upon the exportation of specie, as a
concomitant restriction, together with others, in order to diminish the
general mass of importations, and thereby to set the balance even.
In a trading nation, I allow, that no restriction of that kind ought to
be general; because it then affects the useful and the hurtful branches
of importation equally: but in Henry’s days, the sale of corn and wool
was sufficient to procure for England all it wanted from abroad; and the
interests of trade were not sufficiently combined, to enable the state
to act by any other than the most general rules. Forbidding the
exportation of coin was found to promote the exportation of English
productions, and this was a sufficient reason for making the prohibition
peremptory. In this view of the matter, did not Henry judge well, when
he obliged the merchants who imported foreign goods, to invest the price
they received for them in English commodities? Once more I must say it,
he was not so much afraid of the consequences of the money going out, as
of the corn and wool remaining at home; had he been sure of the
exportation of these articles to as good purpose another way, the
prohibition would have been absurd; but I am persuaded that was not the
case.
The example taken from France is this.
After the fatal bankruptcy in 1720, by the blowing up of the Missisippi,
the trade of France languished from the effects of the instability of
their coin, until the year 1726, when it was set upon that footing on
which it has remained ever since.
Upon that last general coinage, the same principles of enriching the
King by the operation, directed the conduct of the minister.
The old specie was cried down, and proscribed in circulation: but it was
thought, that as it was the King’s coin, he had a liberty to set a price
upon it, at a different rate from any other bullion of the same
fineness; and that he had also a right to command the proprietors of it
to bring it to the mint at his own price.
The consequence was, that those who could were very desirous to send it
to Holland, in order to draw back the value they had sent in bills upon
Paris.
Under such circumstances, were not prohibitions upon the exportation of
this coin most consistent with the plan laid down? We shall, in the next
chapter, examine the consequences of this operation upon the exchange of
France.
What has been said, will, I hope, suffice to explain some of the
principal motives which statesmen may have, when they lay restrictions
on the exportation of the metals, with a view to favour the trade of
their nation.
But besides the interests of trade, there are other reasons for laying
prohibitions on the exportation of the national coin, although that of
bullion be left free under certain restrictions.
As often as it happens, from whatever cause it may proceed, that the
value of a nation’s coin falls to par with bullion of the same fineness,
that coin, if exported, may be melted down. This is a loss; because it
puts the nation to the expence of coining more for the use of
circulation.
When nations give coinage gratis, or when they allow the coin of other
nations the privilege of passing current under denominations exactly
proportioned to its intrinsic value, then coin never can be worth more
than any other bullion of the same standard; consequently, will be
exported or smuggled out upon every occasion.
If, therefore, a nation does really desire to avoid an expence to the
mint, they must make it the interest of merchants to export every other
thing preferably to their own coin. This is done by imposing a duty upon
the coinage; and this will either prevent its going out unnecessarily,
or if it be necessary to export it, the coin will return in the payments
made to the nation, in consequence of its advanced value above any other
bullion which can be sent.
The forbidding the exportation of coin, implies a restriction upon the
exportation of bullion; because, unless the bullion be examined at the
custom house, and the stamps upon it looked at, it may happen to be
nothing but the nation’s coin melted down, with an intention to avoid
the law. For this reason, whoever brings bullion to be stamped, whether
it be for exportation or not, must declare that it is not made of the
nation’s coin. How slender a check are all such declarations! The only
one effectual is private interest; and as no man will take his wig to
stuff his chair, when he can get cheaper materials equally good, so no
man will melt down coin which bears an advanced value, when he can
procure any other bullion.
On the whole, we may determine, that a flourishing commercial state,
which has, on the average of their trade, a balance coming in from other
countries, should lay it down as a general rule, to facilitate the
exportation of their coin, as well as bullion: and if a very particular
circumstance should occur, which may continue for a short time, they may
then put a temporary stop to it, and facilitate the payment of the
balance in the way of credit.
I have enlarged so much upon the methods of removing the first
difficulty of paying a balance, with the coin or bullion found in a
nation, that what remains to be said upon the second difficulty, to wit,
the procuring them from other nations, need not be long.
Were the mint weights of all countries sufficiently determinate; were
the regulations concerning the standard of bullion exactly complied
with; and were the current market prices of that important commodity,
considered as a valuable piece of intelligence every where, the bullion
trade would be much easier than it is.
We have said, that when the reciprocal debts of two nations are equal,
there is no occasion for bullion to discharge them. But trading nations
are many; and from this it may happen, that one who, upon the whole, is
creditor to the world, may be debtor to a place which is also creditor
to the world; and in this case bullion is necessary to pay the debt.
If a man owes money to a person who has many creditors, the person
owing, may buy up a claim against him, and pay what he owes in that way:
but if the person to whom he owes money be indebted to no body, then the
debt must be paid with ready money. Just so of nations. For instance,
when bullion is demanded to be exported to Holland, the English
merchants, who are creditors on Spain and Portugal, take from thence
their returns in bullion, for the sake of paying a balance to Holland,
which is, upon the whole, creditor to the world.
But as it seldom happens, that he who deals with Holland is the person
who has credit in Spain or Portugal, he is obliged to apply to Portugal
merchants to procure bullion. They again who trade thither, having
profit on the returns of the commodities they bring from thence, will
expect the same profits upon the bills they give to the man who wants to
take his return in bullion. This plainly raises the price of bullion in
the English market; because it is brought home in consequence of a
demand from England. On the other hand, when the demands of England for
Portuguese commodities is less than the value of what Portugal owes her,
the Portugal merchants in London are obliged to take the balance in the
metals. These come to the London market, and are offered to sale to
those who want them: then the price of bullion falls; because the demand
comes from the other side.
To go through all the operations which merchants employ to abbreviate
the process I have been describing, would, indeed, better explain the
practical part of exchange, than what I have said; but I write, not to
instruct merchants, but to extract from their complicated operations,
the principles upon which they are founded.
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CHAP. IV.
_How the Price of Exchange_, in a prosperous trading Nation, _may be
prevented from operating upon the whole Mass of reciprocal Payments, in
place of affecting the Balance only_.
We have taken it for granted, that the price of exchange is a hurt to
trade in general.
In this chapter, we shall inquire more particularly than we have done,
in what that hurt consists. The point of view of every man, whether he
be a merchant or not, is first honestly, and as far as law and fair
dealing permit, to consult his own private interest; and in the second
place, to promote that interest with which his own is most closely
connected.
According to this rule, every merchant will endeavour to manage his
exchange business to the best advantage to himself. If the balance be
against his country, he will sell his bills on the country creditor as
dear as he can; that is, he will endeavour to raise the price of
exchange as high as he can against his country, whatever hurt may
thereby result to the general trade of it; and in so doing, he only does
what duty to himself requires; because it is by minding his business
only, that he can trade upon equal terms with his neighbours, every one
of which avail themselves of the like fluctuations, when they happen to
be in their favour.
From this I conclude, that since the loss upon high exchange against a
country, affects principally the cumulative interest of the whole,
relative to other trading nations; it is the business of the statesman,
not of the merchants, to provide a remedy against it.
The whole class of merchants, no doubt, exchangers excepted, would be
very glad to find the course of exchange constantly at par. This is also
greatly the interest of the state; because it is from the _balance_ in
its favour, not from _the profit made in drawing that balance_ from the
debtor, that the state is a gainer. This must be explained.
I am to shew how it happens, that a nation is only benefited or hurt by
the net balance which it receives from, or pays to her neighbours: and
that the whole expence of paying or receiving that balance, is not
national, but particular to individuals at home; consequently, it would
be the interest of all states, that balances, both favourable and
unfavourable, were paid by the nation debtor, at the least expence
possible.
The great difficulty in communicating one’s thoughts upon this subject
with distinctness, proceeds from the ambiguity of the terms necessary to
express them. This may be avoided by adopting the technical terms of
merchants; but these are still more difficult to be comprehended by any
one not conversant in commerce. I shall acquit myself of this difficult
talk the best way I can.
When we speak of a balance between two nations, we shall call the nation
who owes the balance the _nation-debtor_; the other to whom it is owing,
the _nation-creditor_.
Balances imply reciprocal debts; consequently, reciprocal debtors and
creditors. To avoid, therefore, confusion in this particular, we shall
use four expressions, viz. the debtors to the nation-creditor; the
debtors to the nation-debtor; the creditors to the nation-creditor; the
creditors to the nation-debtor.
Let me suppose that Paris owes a balance to London, no matter for what
sum. The reciprocal debts between Paris and London are all affected by
the consequence of this balance: that is to say, some pay or receive
more than the real par; some pay or receive less. To discover where the
profit centers, we are now to inquire who are those who receive more,
who are those who receive less. And as profit and loss are here only
relative, that is to say, the profit of the one is compensated by the
loss of the other; we must see whether or not, upon the whole, the price
of the exchange in this case be favourable to London, to which, by the
supposition, the balance is due, and unfavourable to Paris, which is the
debtor.
The question thus stated, let us examine the operations of exchange at
London and Paris, and the state of demand in both, for money or bills.
In the London market, the demand will be for money in London for bills
on Paris; and he who demands, must pay the exchange; consequently, the
London merchants, creditors to the _nation-debtor_, will pay the
exchange; that is to say, they will sell their bills on Paris below par;
and the London merchants, debtors to the nation-debtor, will buy them,
and gain the exchange; that is, they will buy bills upon Paris below
par.
Now as this negotiation is carried on at London, I must suppose it to
take place amongst Englishmen; one part of whom will gain exactly what
the other loses; consequently England, in this respect, neither gains or
loses by the exchange paid in London.
Let us next examine the interest of the merchants, and the interest of
the nation’s trade.
The creditors to the nation-debtor, who have lost by the exchange, are
those who have exported English commodities to France. Upon this
profitable branch of commerce the exchange occasions a loss, the
consequence of which is, to discourage exportation.