Chapter XXXIII: Part II: Of Banks

CHAP. I. Having deduced the principles which regulate the rate of interest, I proceed to investigate those which influence domestic circulation; and as banks are the great engine by which circulation is carried on, in tracing the nature of banks we shall fully understand its policy and principles.

Banks either circulate notes, or transfer credit written in their books: the first are called banks of circulation; the latter banks of deposit.

All banks are founded on credit, and according to the nature of their institution, I may divide the credit they are built on into three kinds, viz. private, mercantile, and public.

Private credit is when the ground of confidence is real property, pledged for the security of the loan.

Mercantile credit is when the cause of confidence is in the trading stock, abilities, integrity, and good fortune of the person who obtains it.

Public credit every one understands. It is when the ground of confidence is a fund secured by public faith, in favour of the creditors, for the interest and capital due, which last however is never exigible from the state.

Private credit is the most solid of the three; mercantile credit is the most precarious; and public credit depends entirely upon the maxims of every government with regard to public faith.

It is the object of confidence, not the quality of the person obtaining credit, which determines the nature of the credit. A merchant may grant bond on the credit of his lands; a landed man’s bill, as member of a mercantile company, may only affect his stock in trade, and a Prince may pledge a province for a sum of money.

The debts of a state, and the bills of merchants, are more easily transferred than private securities.

Public and mercantile credit stand upon a more precarious bottom than private security. A suspicion of insolvency will shake the two former; real insolvency only will destroy the latter.

These are some of the peculiarities which characterize the differences between the three kinds of credit. The justness of the distinctions I have made appear from them, and from other circumstances mentioned in this chapter; and the utility of such distinctions will appear from their application as we proceed.

CHAP. II. To establish private credit, on the most solid and extensive bottom, the effects of debtors should be rendred of a ready conversion into money; the sale of lands should be rendred easy and expeditious; no entails or cloggs by mortgage and the like, should be allowed; debts upon possessions ought to be registred, and those due to banks (the great public debtors) should always be considered in a most favourable light.

CHAP. III. Banks of circulation upon private credit, are of great use in the infancy of industry. In countries where it is only taking root, the greatest obstruction it meets with is a scarcity of money. When money is scarce, payments are ill made; and when the uses for money increase, if money be not made to augment in proportion, alienation will cease to go on, and payments will daily be more precarious. This is so evident that I shall not insist upon it.

Now as every individual in a state does, less or more, support industry by consuming its produce, money must be provided for every one in proportion to the value of his property. This opens at once the principle of banks upon private credit.

He who has money will, every where, willingly lend to every one who can give good security for it; and the obligation granted by the borrower is considered by the lender as better to him than the money he lends. Before the establishment of banks, such loans were made in coin; but as people discovered that a good obligation was as good as coin, they discovered also, that when obligations could be made to circulate, they might supply its place.

For this purpose, banks found out an expedient of dividing obligations secured upon property into small parts of the capital sum; and by delivering them back to the borrower, with an obligation to pay them in coin to the bearer on demand, they constituted themselves debtors to the public for every note. The consequence of this was, that the coin of the country became less useful in circulation; and as the banks demanded it, and even gave premiums for obtaining it, it came into their hands, and served the purpose of changing notes; that is, of subdividing the sums mentioned in them, into the lowest denominations of the money of the country.

There is not a nation in Europe so ignorant as not to feel the use of this policy; but there are few who have discovered how to establish the confidence of the public in this general debtor, the bank. The reason is, that people imagine a bank should at all times be able to turn all their paper into coin. Were this possible to be done, where would be the use of banks? How could they multiply money?

From this short exposition, we may understand the difference between banks upon private, mercantile, and public credit. The first lend upon the security of possessions; the second, upon bills of exchange, which is called discounting; the third, upon the security of the public funds.

CHAP. IV. A scarcity of money only being found to stop the progress of industry, and thereby to circumscribe the gains of merchants who supply consumption; and they perceiving that men of property become bad customers, more from the impossibility of making payments than for want of an inclination to consume, joined together, and formed a considerable stock which they exposed to the eyes of the public. This gave them credit, and every one who had money to lend was fond of placing it in their hands. Other people who wanted to borrow, applied to them for money. Their answer was, we have no coin; but if you want money for any purpose, we can assist you in credit, if you will give us security upon your estate. Here is, said they, a note of ours, which any body will take from you as payment for what you want. This was the same thing to the man who wanted money for a particular use, as if they had given him coin; and as such demands became frequent, the notes were printed, and insensibly banking was established.

States perceiving the abuse which might follow, were every one allowed to issue paper in this manner, judged it proper to erect companies, who lent them considerable sums as a security for their faith to the public; and the superior credit of such companies drew the confidence of the public, and circumscribed the dealings of individuals. Thus the trade of Lombards, who had formerly supported circulation by their bills of exchange payable to order, received a farther extension by the establishment of banks, who, by issuing notes payable to bearer, rendred them, in all commercial countries, every bit as useful as any coin.

Banks once established, regulations became necessary; and of these the first and fundamental one, was, to issue no notes but upon good security. If it be asked, what security should be taken? The answer is, the best those who want credit can give. In a country where trade and industry are little known, but where a taste for refinement is taking place, demand must be encouraged, in order to augment the supply. And as this demand for consumption should, naturally, come from men of landed property; the bank, therefore, should first resolve to issue notes upon the security of that kind of property.

When industry becomes more extended, and when trade becomes more secure, from the solidity of mercantile funds, banks may then begin to discount bills of exchange, and as this branch of credit enlarges, the bank will by degrees participate of the nature of those secured upon mercantile credit.

When public credit, again, is well established, they will lend upon government securities, pledged in their hands, and thus become founded upon public credit.

According therefore to the principal object of their trade, they are said to stand upon private, mercantile, or public credit.

When a proprietor of lands gives his bond to a bank, it should be understood, that as long as he regularly pays the interest of the money borrowed, the bank is not to demand the capital.

For this bond they give notes, which are considered as ready money, and therefore carry no interest. So the profit of the bank is to receive interest for what they lend, and to pay none for what they owe.

What they owe is the paper they issue. They owe this to the public; and the security which the public has, is the security which the bank received from the person who borrowed from them.

Hence the solidity of banks upon mortgage. Their notes become money, and this money is secured upon the whole stock of the bank, and the whole property engaged to them.

But as the stock of the bank is of a determinate value, and as the notes they issue may very far exceed it, the credit of a bank will be precarious, unless the value of the securities upon which they lend, be equal to all the notes in circulation. It will also be precarious in proportion as the securities themselves are so. Hence the interest the public has to take care that banks give credit upon nothing but the best security.

CHAP. V. A bank, therefore, which lays down a rule to lend upon the mortgage of solid property only, would destroy confidence, if it should launch out in giving credit to those who have no solid property to pledge.

CHAP. VI. The use of all banks is to support domestic circulation: this is two-fold; that carried on by consumers, and that carried on by traders and manufacturers, who supply consumption.

The circulation carried on among the first is in proportion to their income, and their credit should be in proportion to the funds which produce it. The circulation carried on by the last is in proportion to the demand for their industry.

If a bank be established on the credit of solid funds, it is very plain that they cannot support the circulation of manufacturers and dealers upon the same terms, or in the same way they do that of proprietors. They may indeed discount bills; but they cannot give a permanent credit upon a security which is not founded upon property. This opens a new combination.

Trade and industry are dispersed through many hands, and if the stock of those who carry them on be compared with what is necessary for that purpose, it will appear very small. What is deficient in stock must be made up to them in credit; and this will be in proportion to their integrity, capacity, and good fortune. A frail security for paper, which is to become the money of a nation! Such securities must either be rejected by every bank whatever, or the whole fabric will tumble into ruin. But this subaltern class of dealers may have recourse to merchants, whose wealth and funds are solid and extensive. To these a bank may give credit, and they again, in their dealings with the other class, may indemnify themselves of all the risk they run, by profits in proportion to it.

This class of merchants I call _exchangers_; because they deal principally by bills of exchange in the credits they give, which are of the greatest advantage to an infant trade and a growing industry.

CHAP. VII. When banks were first established, there was no money known but coin, and many there still are, who do not clearly see how money can possibly be made of any thing but metal. The scarcity of coin raised the rate of interest, and when banks began to lend their paper, they exacted the same interest as if they had been lending coin. Hence they were obliged to promise payment of their notes, in coin, upon demand. In consequence of this, the policy of circulation proceeds upon the supposition, that bank notes are equal to coin in every respect; and when any interruption happens in the ready exchanging them at the bank, all runs into confusion. I shall afterwards shew how this might be prevented.

While a country has a balance of trade, either at par or in her favour, no body has occasion for coin, except to reduce bank notes to their lowest denomination of money. But when a balance is due to other nations which must be paid in gold and silver, every one who wants coin for that purpose, runs to the banks, which are obliged to pay in it, and then they are thrown into distress. Hence we may conclude, that a bank taking upon itself the obligation of paying in coin, without carrying its policy farther than the banking trade, cannot stand its ground in a country which owes, upon an average, a balance to other nations. This opens a new and a most curious combination.

CHAP. VIII. In the mechanical operations of trade, when they are not combined upon principles, and directed by a superior policy, every balance due from one nation to another upon the whole of their reciprocal payments, that is, in consequence of their debts and expences abroad, as well as in the course of their mercantile operations, must be paid in the metals.

For transacting this balance, there is a set of merchants who deal in the business of exchange. Every debtor to another country is supposed to have value in his hands for it, which he converts into bank-paper; with this he buys a bill of exchange, drawn upon the place where he is debtor, and the exchanger who sells it, demands coin of the bank, which he sends off for payment of his bills. If during this operation the bank should stand with its hands across, and only think of expedients to provide coin, it is evident, that if specie should totally fail in the country, trade must be at an end, and the credit of the bank would be undone: for no body will enter into every combination necessary to discover the impossibility of converting the whole paper currency of a nation into gold and silver. Thus a bank which cannot pay in coin, will be supposed to be ruined, though in reality it may be worth half the property of the state.

Is it not then of great consequence to banks, and to a nation, that the principles of their trade, and the security of their paper, should be well understood? And is it not wonderful, that they themselves have not made evident a thing which they must understand far better than any one who has not had their experience?

CHAP. IX. When a country gentleman owes money in town, beyond what his rents can pay, does he not borrow from some body who has money? Does not this borrowing prevent his lands and his houses from being torn to pieces by those who have a right to demand money of him? Would he not be laughed at, if he were to delay pledging a part of his property, in order to secure the whole?

The case is just the same with banks. They owe a sum of coin equal to all the paper they have in circulation. In this they represent the country gentleman. Foreign nations demand payment from them in coin; because it is the same thing whether this demand be made directly on the bank, or on those who can demand it of the bank. Such nations represent the town. Must not then the bank borrow upon the credit of the securities pledged at the time they issued their notes, and which to them represent the gentleman’s lands? And can they borrow from any but those who have money? Their own country can have none to lend, while they owe a balance; they must therefore borrow from other nations, and transfer what they borrow to their creditors abroad.

Hence I conclude, that as nations which have coin pay what they owe with it, and thereby diminish its quantity; so nations whose money is their land, must pay in land, to the diminution of that species of property: and as a man who owes a thousand pounds upon his estate is only proprietor of it for the remaining value; in like manner, a country which pays an annual interest to other nations, is only proprietor of what remains.

CHAP. X. If the country gentleman, who is pushed by his creditors for money, which he cannot expect to draw from his rents as they become due, should borrow, for a few weeks, from one who, after that time, will have occasion for his money himself, he will be put to all the expence of giving security for it, and at the end of that short time, he will be at as great a loss as ever to find money to reimburse the man who had lent it him. This represents the expedient used by banks to obtain temporary credits, instead of a permanent loan upon a regular interest.

CHAP. XI. When trade goes on well, and produces a regular balance in favour of a country, the trade of banking is easy, and few employments require less capacity. But when the balance begins to be unfavourable, and when, in self-defence, they are obliged to deal in exchange, the case is different.

Whatever balance is due abroad must be paid by the banks, as has been said, either in coin or in credit. As long as they pay in coin, the business of paying the balance is left to exchangers, who conduct the operation. But whenever banks borrow abroad, upon a permanent loan, and thereby acquire a fund to draw upon, the business of exchange falls naturally into their hands, and they may profit of it according to circumstances. In this case, not one shilling of coin can go out of the country, in the way of payment; because there will be a loss to any one who sends it away, when he can pay cheaper by a bill.

CHAP. XII. But the most complicated combinations arise from the consequences of a wrong balance on the state of domestic circulation. I hope this matter will be more easily comprehended, from the short recapitulation I am now to give of it, after all that has been said upon the doctrine of taxes, and of the difficulty of paying them, when money is sent abroad.

Money is the instrument of alienation; and when this instrument is taken away, alienation must cease. Now, it is a matter of indifference as to circulation, whether money be rendered scarce by being sent out of the country by the state in time of war, or by the subjects who owe it to strangers in time of peace. A determinate quantity of money is requisite for domestic circulation. In whatever way this comes to be diminished, it is the duty and interest of banks to fill up the void as fast as possible, by readily furnishing credit at all times to those who can give security for what they demand. If banks, by paying balances, shall have exhausted their fund of coin, the fault is their own. Why did they not in time provide the necessary funds abroad? But in whatever manner they pay the balance, the consequence is, to take a sum of money equal to it out of domestic circulation; and this cannot be replaced but by more money lent by them upon new securities. If an ill grounded fear should at such a time engage them to refuse credit, when demanded, the country will be in a worse situation than if banks had never been established, from the sudden diminution of money, which, without that establishment, never could have happened.

But if banks would consider the whole foreign balance as immediately their own debt (and it is so, when they are obliged to pay it) they would provide the easiest method of acquitting it: since none of the expence incurred can fall upon them, in any proportion to the gain they make, in receiving interest for all they lend, and in paying none for what they owe within the sphere of their own circulation.

CHAP. XIII. Whatever contracts circulation, hurts a bank, and offers no relief to it with respect to the payment of balances. If they borrow money at home, they cut off the branch they stand upon, unless they continue at the same time to give credit to all who demand to borrow upon good security. This last combination was omitted in the chapter I am now recapitulating; because of the multiplicity of those I was obliged to introduce, in order to demonstrate how hurtful it is for banks voluntarily to diminish the circulation of the country where they are established. I shall therefore bring it in here, and refer to the chapter for the other combinations which cannot be abridged.

Did banks, upon mortgage, make it a rule to borrow all the money offered to them, at a small deduction from the common interest, while at the same time they continued to lend as formerly to every person of good credit; the consequence in a little time would be, that they would become the absolute center of all borrowing and lending, and the greatest part of the expence of drawing securities would be saved.

Every person who had money to lend, would lend it to the bank; and every one who had money to borrow, would borrow it of the bank. Upon these two operations, the difference of interest paid, and received, would more than balance the additional expence of so great a detail. But then indeed some new law would be necessary to facilitate securities. The clogs laid upon solid property oblige the bank to insist upon conditions, which put it out of the power of many persons of good credit to borrow from them. But I do not propose plans: my aim is confined to principles; and from those I have mentioned a new clause in bank notes would arise, viz. to pay in coin, or by a transfer of interest at a determinate rate, at the option of the bearer, not of the bank.

CHAP. XIV. This would be an optional clause, very different from that lately introduced into Scotland, where the option of paying interest was left to the bank. This has since been wisely suppressed; because it proved a heavy clog upon circulation, and enabled the bank to avoid doing what their own interest, and that of the nation, required of them, viz. the ready payment of all balances against the country. But in suppressing optional clauses, government should facilitate the means of paying balances, and of providing coin. This is done by establishing and supporting the credit of the banks, in proportion to the solidity and extent of their funds. An example of this nature occurred in Ireland, in April 1760, when the parliament interested itself directly in the support of the credit of some private bankers. A mint also is necessary; or if this should be judged improper or superfluous, some assistance at least should be given in conveying coin from the place of its fabrication.

CHAP. XV. All branches of policy are brought to perfection by degrees, when, instead of being established at once on sound principles, they introduce themselves mechanically, by custom and practice only. When therefore a national bank is not found to answer all the purposes expected from it, private people imitate their plan, and fill up the void. Thus in Scotland, when the banks of Edinburgh did not sufficiently support circulation in the more distant parts of the country, private banking companies were erected, and degenerated into a great abuse. Every one issued notes payable to bearer. Thus the public was filled with paper money, the credit of which was quite unknown to many, who were however forced to receive it.

Whatever is payable to bearer, is payable to the public; and no doubt the public has a good right to prevent the issuing of notes by any but such as it has confidence in. When a note is payable to order, every one who circulates it is responsible for the value; but when it is payable to bearer, there is no recourse upon any but the first grantor of the obligation. Such regulations therefore should be made in this respect as may give a solidity to the paper, facilitate a general circulation, and prevent the establishment of a currency confined to particular districts within the same country, which tends to introduce a course of exchange from one town to another. This would be the case, were the circulation of every county carried on by the county bank. A communication, therefore, of interest between the banks of a country is requisite, or else the obligation to pay should not be confined to the place where the bank is established.

CHAP. XVI. Here I resume the principles I have deduced, in a short sketch of a general plan of regulations for a bank of circulation.

CHAP. XVII. If proper regulations upon the banking trade should be found inconsistent with the laws and manners of a people, which require a more extensive liberty to every one to carry on what commerce he thinks fit, I think it is reasonable that every company of merchants who issue paper, payable to bearer, without the sanction of government, should be obliged to subject their books to some kind of public inspection, that it might be seen whether the credit they grant to individuals be of a sufficient solidity to answer for the notes they circulate.

CHAP. XVIII. The numberless distresses of the Scots banks at the end of last war, made it necessary to show, in a particular chapter, what the consequences might have been, had the banks at that time totally withdrawn their credits, and given up business. This step would, 1_mo_, have cut off their whole profits of banking. 2_do_, It would have ruined the whole class of exchangers; and with them, 3_tio_, the whole trade and manufactures of Scotland.

CHAP. XIX. Here I take a farther step into those intricate combinations. I now shew how the whole obligation, both of paying in coin, and discharging foreign balances, may be taken off from those who administer a national bank. Their notes are proposed to be paid by a proportional transfer of interest. All interest due by banks on that account, and to banks for credit given, is proposed to be paid in coin at certain terms. Those who have occasion for coin are to buy it at the mint: but this coin is entirely calculated for domestic circulation; and therefore a very moderate quantity of it will be necessary. And for the payment of all sums due to foreign nations, I lay it upon government, according to the plan proposed in the 5th chapter, upon exchange.

Thus the whole policy of circulation is divided into three distinct branches:

1_mo_, The melting down of property, and keeping circulation full at all times. This is the business of banks.

2_do_, The providing of coin is the business of mints.

3_tio_, The granting bills on foreign parts, for value in the national currency, is the business of the state.

CHAP. XX. The objection to this doctrine is, that if notes are not payable in coin, they cease to be of value. The answer is short. The use of paper money is to keep reckonings of value between people who have property; the use of coin is to avoid giving credit to people who have none.

The value of the paper in the country is ascertained by the value of the interest which is paid for it in coin; and by not paying the capitals in coin, you prevent its being carried off without necessity, whenever a balance becomes due; which balance might be paid by the means of credit.

CHAP. XXI. I shew, by many arguments, (afterwards employed in the 10th chapter, upon public credit, and which render this combination more simple than I should otherwise have been able to make it in this place) that the return of a favourable balance of trade will clear the bank of all the foreign debts contracted by it, for the relief of the country; as a like favourable balance on the trade of Great Britain has the effect of setting that nation free from a proportional part of the money due to strangers. In this case, the favourable balance is incorporated in the public funds due to natives: in the other case, it is incorporated with the stock of the bank securities, and enables them to relieve that part of them which was engaged for the interest paid out of the country.

CHAP. XXII. The constitution of the bank of England differs essentially in some particulars from that of banks upon mortgage, and private credit. It is not so much calculated for multiplying the currency, by melting down private property, as for facilitating the circulation of the trade of London, and exchequer of Great Britain.

The grounds of confidence upon which the notes of this company stand are very great.

1_mo_, A capital of eleven millions sterling, for which they are creditors to the nation.

2_do_, A sum of credit-cash at all times in their hand, of about eleven millions more.

3_tio_, The bills of exchange of all the great merchants of Europe, which they discount.

4_to_, When they issue paper to government upon the faith of taxes, or circulate exchequer bills, they have the security of the public faith for the short advance of a few months.

This bank, I have said, is more useful for promoting circulation than for augmenting it. It has however lent its assistance in this respect on very critical occasions. It has circulated exchequer bills; and tallies, which, from discredit at the time, were as ill calculated to supply the use of money, as lands or houses are, from their unwieldy nature. The great advantage the public reaped from such operations, abundantly shew the utility of banks, which are calculated for that very purpose.

The principal operations of this bank are, to receive and pay away the greatest part of all the national revenue, expences, and debts; to discount bills of exchange payable at London, and to supply the country with coin.

The demand of London for subsistence and manufactures from the country of England is so great, that the whole amount of what is sent up to that city, for taxes, and for land-rents there expended by the proprietors, does not compensate it. From which it follows, that by the bank’s not giving credit upon private securities, the whole of their paper is in a manner confined to the capital; and if any part of that paper casually goes into the country, it quickly returns, in payment of what would otherwise be remitted in bills. So that paper circulation in the country of England is very inconsiderable, when compared with the coin.

The intention of this chapter is to examine and compare the principles of the two species of banking, and to point out their several consequences as to circulation; from which I am led to think, that if banks of circulation were to be established in the country towns of note in England, they would greatly promote industry every where, and occasion no inconvenience from their contrast with the national bank.

CHAP. XXIII. After deducing the principles upon which the solidity of paper money is established, I proceed to point out the bad consequences of issuing bank-notes upon a precarious security. The bank established in France by Mr. Law, and the fatal catastrophe it brought upon that nation, furnish excellent matter for illustrating the doctrine of paper credit.

The late King of France left, at his death, a debt upon his kingdom of 142 millions sterling; the coin being at 28 livres the marc of silver.

CHAP. XXIV. In a few months after his death, the debt was reduced to 100 millions, by the turn of a wheel. The coin was put at 40 livres the marc. But as the hundred millions sterling, _in intrinsic value_, after the reduction, contained as many livres in _verbal denomination_, as the hundred and forty millions did before, the greatest inconvenience discovered by the people was confined to the necessity imposed upon them to sell their old coin at the King’s price.

At this time Law set up his bank, and without doubt assisted people in that respect, with very great benefit to himself.

CHAP. XXV. He divided the capital stock of the bank into 1200 shares, of 5000 livres each (the livre at this time was exactly a shilling sterling); and the purport of the notes he issued was, that payment should be made, at all times, in livres of the same intrinsic value.

This bank was established on the principles of the Scots banks, and lent sums upon every species of good security. The consequence was, that in less than three years, France, from being in the most miserable situation for want of money, credit, consumption, and industry, was raised, as by magic, to the greatest affluence. The reason was plain: there wanted nothing but an instrument to set all the inhabitants to work. This Law gave them in a moment; and their own work was the cause of the affluence which astonished them.

This effect was produced by an inconsiderable sum of notes: they did not exceed three millions sterling when Law gave up his bank. But credit and confidence were established by that small sum; and the notes brought out all the coin which had been formerly locked up. It is not a great quantity of money, but an exact proportion of it, according to demand, which supports trade and industry. That proportion may be sustained by the means of banks, but by no other expedient whatever.

CHAP. XXVI. Law’s bank was no sooner established, than he sought to enlarge his bottom. He found a trading company ruined in their affairs, though intitled to great privileges. He found also large sums of public state billets circulating at great discredit, from an ill paid interest. He got a grant of the company to himself and associates. He opened a subscription for 200,000 shares, of 500 livres each. He took payment in those discredited obligations; and when he had got the state billets, (given in at subscribing) he engaged the Regent to promise punctual payment of the interest. This was no sooner done, than the discredited paper, which was become an action, or a share, as we have called it, only by being subscribed for to Mr. Law, rose above par. The nation cried out, a _Miracle_! Law was a saviour, in the eyes of some, a conjuror in the opinion of others.

His credit and his capacity for conducting the greatest undertaking within the power of numbers and computation, being established, inspired the Duke of Orleans with a scheme of unbounded ambition, which, in favour of many who have never rightly comprehended the nature of it, I have been at very great pains to trace, in the eight following chapters. And as a recapitulation is useful to assemble ideas within a small compass, which have been dispersed through many combinations in the work itself, I shall here, in a few lines, give a general idea of the whole plan.

The Regent perceiving the use of paper money, well secured on solid property, resolved to take the bank into his own hands, in order to issue paper sufficient to pay off the whole debt of France. Now paper issued for paying debts is secured upon no fund at all. It is the same as if it were issued for payment of meat and drink. The whole security therefore was his own word.

But the difficulty was to prevent this paper from instantly returning upon the bank; because it far exceeded all the uses of circulation, and, consequently, could not be suspended in it.

The expedient fallen upon was to raise the value of the actions of Law’s company, (which by the subsequent incorporation of new privileges were multiplied beyond 600 000) to a great height, by promising great dividends upon them. The company accordingly promised a dividend of 200 livres a year, upon a capital which was originally worth no more than 500 livres.

The great quantity of paper money dispersed had sunk the rate of interest to 2 _per cent._ The dividend, therefore, combined with the rate of interest, carried the market price of the action to 10 000 livres. Here was a new fund provided as an outlet for all the bank notes paid to the creditors; and in proportion as they bought the actions from the Regent, or the company, whom I here consider as the same, the notes were to be cancelled.

By this operation all the debts of France were to be converted into actions of the company of the Indies, and were to share its fate. But then it must be remembred, that this company had in a manner the whole revenue of France in farm; and by a recapitulation of the different branches of their profits, their income amounted to eighty millions of livres a year. So that if matters had been well managed, had credit been supported by fair dealing, had no arbitrary acts of power, in tampering with denominations of coin and money, taken place, and had the Regent supported and encouraged the company; they in fact might have been able to pay more than all that was required of them; and the very diminution of the interest of the public debts, by the fall of money to 2 _per cent._ was, in effect, cutting off one half of the capital. So that if we suppose the total value of the 2000 millions of debt equal to 100 millions sterling, the debts of France, by this scheme, would have been reduced to an annuity of 2 _per cent._ on a 100 millions, or two millions sterling a year paid to the company, who then represented the creditors of the nation.

But the project was too great; the capacity of those who were in the management was too small, and the time was too short for bringing about so great a revolution: thus it failed; but in a way which suggests no reason to believe that it might not have been supported.

CHAP. XXXIV. The denomination of the paper was reduced to one half by an act of power: a man who, for example, had a bank note for 100_l._ had it reduced to 50_l._ This at once destroyed the whole credit of France. But it would have stood its ground, without doubt, had the Regent called the fifty pounds with which he paid such a note, one hundred pounds; although, if you abstract from the interests of debtors and creditors, which never were attended to, it was absolutely the same thing. The altering the denomination of paper implies, however, this additional injustice above that of altering the denomination of coin, that it changes the value of the paper in all cases; because it contains no other value than the denomination: whereas coin has a value independent of that, which no law can alter.

CHAP. XXXV. The form of a bank proposed for France, in this chapter, is pretty much the same with that mentioned in chap. 16; only here I have not even admitted the payment of the interest in coin, for fear that an act of power, by carrying off a few thousand louis d’ors on a present exigency, might totally ruin the credit of such a bank, and consequently draw ruin on the whole nation.

This bank is intended merely as an office for keeping accounts between people of property, and thereby of greatly increasing and supporting circulation.

CHAP. XXXVI. Having dismissed the subject of banks of circulation, I come next to those of deposit. Here I deduce the principles upon which the bank of Amsterdam is established.

This bank issues no paper, and grants credit upon no security but coin locked up in their vaults. Consequently, the ground of their credit is the faithful preservation of this coin. Were it at any time to be diminished below the value of the credits written in their books, the nature of the bank would be changed. Were the coin to be lent on good security, such a bank would then immediately become a bank of circulation upon mortgage; since it would be the same as if the credit had been at first granted upon that security. Were the coin disposed of for no value, the bank would be from that moment bankrupt in fact, although the secret might be kept for a long time.

CHAP. XXXVII. The intention of establishing a bank of this nature at Amsterdam was to fix the seat of trade in that city. The ordering all bills of exchange to be paid to the bank in coin, and the giving to the holders of the bills only a credit in bank for the value, was an effectual means of obliging the proprietors of that credit to carry on their trade in the place where their funds were established beyond a possibility of removing them, except by transferring them to others who, by accepting of the transfer, came under the same necessity. Were indeed trade to become incompatible with the situation of the city, as if an earthquake should fill up the port, then the bank would either be removed elsewhere, or the credit writ in their books would become of no more value than gold in an inaccessible mine. This regulation also prevented the circulation of bad coin; because when payment of bills was made to the bank, they took care that nothing but good coin should be received.

From these regulations it appears that money cannot be multiplied by banks of deposit; but on the other hand, it cannot be diminished by exportation, without the act of the bank; and the transfer of credit answers every use of coin in trade, and prevents also its waste in circulation.

CHAP. XXXVIII. Coin is liable to constant vicissitudes. Its denomination may be changed by an act of power, and its real weight may be diminished in circulation. But when it is locked up, all these inconveniences are prevented. Bank money, therefore, being the value of the coin locked up, is constantly the same: whereas all coin which circulates is liable to variations; consequently, these variations are relative to the coin which circulates, and not to the bank-money. The difference between the one and the other is called _agio_.

CHAP. XXXIX. Many have imagined the treasure of the bank of Amsterdam to be immense; because no body can ever take any thing from it, and that it is constantly receiving new augmentations: but the policy of the bank itself destroys this supposition, and shews plainly, that the sum locked up never can exceed what is absolutely necessary for circulating the trade of the city.

It is true, no person can go to the bank and demand to have the amount of his written credit paid him in coin. But were the written credits to exceed the uses found for them, the value of such bank-money would diminish; consequently, the value of the circulating coin would increase, which is the same thing. Now as this would prove a great discredit to the bank, they employ a set of cashiers or brokers to keep the balance even. Their business is to buy and sell bank credit with current coin, and to these the bank gives credit. When there is a demand for bank credit, the cashiers sell it for coin, and both parties going to the bank, a new credit is written, or the cashier’s credit is transferred to the buyer. When, on the other hand, coin is demanded for bank credit, the cashiers pay for it with coin which the bank lends them; and for their repayment, they transfer to the bank the credit they have bought with it. This needs a little explanation. Suppose one to have credit in bank for a thousand gilders, which he wants to send away in coin. He goes to the cashier and sells his thousand gilders of bank credit: the bank lends this thousand gilders to the cashier, and the man who sells the credit gets the coin, and makes a transfer of the credit in favour of the cashier. But as he owes this sum to the bank, he transfers this credit to the bank itself, in payment of the thousand gilders borrowed; and then the bank may expunge it, if they please, from their books; because it is due to themselves. Thus although no money can be demanded of the bank by one who has credit, they can give the money to a third party who does it for them.

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