EXTRACTS FROM THE ADDRESS OF THE BISHOP OF AUTUN ON THE SUBJECT OF BANKS, AND ON THE RE-ESTABLISHMENT OF ORDER IN THE FRENCH FINANCES.
Delivered in the National Assembly, on Friday, Dec. 4th, 1789.
“As a member of the committee whose report you have just heard, I consider myself entitled to address you, both for the purpose of submitting to you some ideas of my own on the subject of the caisse d’escompte, and more especially with the view of bringing to bear upon this subject some important questions, inseparable from it, and essentially connected with the great interests which now so urgently engage your attention.
“The idea of the establishment of a national bank in France, is one which has excited great attention, and which has gained great favour in public opinion.
“Many persons who entertain sound views on the subject of credit, consider such an establishment as indispensable, whilst even those who are least acquainted with the subject—those who scarcely know what a bank is, and who are totally ignorant of the organization suitable to a national bank, seem to derive confidence, amidst the present want of credit, simply from understanding that the National Assembly contemplates the establishment of a national bank. It would indeed seem as if the mere name of a bank were alone sufficient to settle everything; but we must be careful to observe that it is only a well-constituted bank that ought to be established, and not a national bank of any sort. Banks are by no means simple institutions; their object is indeed everywhere the same—to facilitate the circulation of exchanges, and to lower the interest of money; but the means they employ must vary extremely. Banks may be likened to highly-tempered instruments, which must be managed with caution and skill, because either great good or great evil may result from their use. Here, above all, you must be upon your guard against the various systems suggested by cupidity, by superficial knowledge, or by that half-acquaintance with the subject which is so common and so dangerous. It cannot, therefore, be entirely useless to recall to your attention, for the purpose of refuting them, the different ideas which have been promulgated on the creation of a national bank in France, particularly as some of these views have neither been opposed nor discussed, and are, perhaps, of a nature to mislead the well-intentioned. Let us take a cursory view of them.
“The creation of a national bank has been proposed. My opinion is, that a well-constituted bank ought not to be a national bank, whether by that title we understand simply the responsibility of the nation, or that the nation should have established the bank on its own account.
“People are led to believe that, because the nation is about to render itself responsible for the public debt, it might also be answerable for the funds of a bank; but it is very important that these two things should not be confounded.
“The nation ought undoubtedly to become responsible for the public debt, inasmuch as the sums which compose that debt have been lent to the nation, have been employed by the nation, and have been entrusted to the only recognised representative of the nation. In fact, properly speaking, the nation cannot be said to be security for the debt, for the nation is the debtor itself.
“The guarantee which the nation would grant to the bank should be of a totally different nature.
“So far from this national guarantee imparting credit to a bank, such an arrangement would have the effect of depriving of all credit the nation capable of adopting it. Who would place confidence in a nation which should be imprudent enough to entrust to a small number of individuals the management of a bank whose operations would necessarily be unlimited, and whereby all the national property would become mortgaged?
“It may readily be imagined that every possible precaution would be taken to prevent the managers of the bank from being unfaithful to their trust; but still the possibility will always remain, that, should a misfortune befal the bank, it would be necessary either to levy enormous contributions on the property of the country, or to declare the nation itself bankrupt. Would any prudent nation incur the risk of reducing itself to such an alternative? Would any honest nation, valuing a character for integrity, offer a responsibility which might prove illusory?
“The nation, then, cannot, ought not, to become guarantee for the bank.
“Still less ought the nation to establish the bank on its own account; for, to all the inconveniences resulting from responsibility, there would be added many others. The nation would have only two methods to choose between, either to entrust the administration of the bank to salaried officials, or to personally interested managers. In the first case, there would be too much reason to fear that the management of the bank would not receive due attention; while, in the second case, there would be an equal risk of the directors seeking immoderate profits, under the pretence of serving the interests of the nation with which they would be associated. In either case, should any misfortune befal the bank, the representatives of the country would, with much less freedom, deliver their opinion on events in which the interest of the whole nation would be compromised, than if they had merely to judge the conduct of private directors. And, finally, in both cases the annual expenses of management would be increased, and the portion of profits which the nation might directly claim from the operations of the bank, would certainly not indemnify it for the incalculable loss resulting from the diminished interest of money in the kingdom.
“The nation, therefore, cannot become guarantee for the bank, nor can the bank be established on account of the nation.”
“It has been proposed to establish banks of discount (caisses d’escompte) in different towns of the kingdom, and this plan certainly looks somewhat plausible; for it would seem at first sight that if banks of discount are useful, they cannot be too much multiplied, and that if they are favourable to commerce, they ought, above all, to be established in commercial towns.
“But it is easy to perceive that a single bank of discount, or bank of aid (banque de secours), placed in the capital, in the centre of circulation, would not only animate the commerce of the place in which it is established, but would necessarily extend its influence throughout the whole of the kingdom.
“Now, a number of banks of discount, or banks of aid, would not produce the same advantages; for by mutually increasing their credit, they would infallibly injure each other.
“In the first place, the multiplicity of these banks would oblige every individual to examine all the different bank-notes presented to him, whilst at present a great portion of the confidence with which these notes are received, proceeds from the circumstance of their requiring no examination, being recognisable at first sight, almost as readily as pieces of coin.
“This observation is, perhaps, more important than it may appear. There can be no doubt that a degree of credit would be attached to the notes of a single bank applicable to the whole kingdom, which would never be accorded to the notes of a number of banks, dispersed among the provinces; for, as each of these several banks would enjoy a different degree of credit, the notes of each would require previous examination, before being taken in payment.
“But, independently of this consideration, another very grave inconvenience would arise. The embarrassments of any one of these banks would inevitably operate prejudicially on the credit of the rest, from the correspondence which would exist among them. To multiply the places where these embarrassments might ensue, would be to multiply their probability, and it is, doubtless, important not to augment the chances which may compromise the trade and the monetary circulation of the kingdom.
“A plan has been proposed for supplying the place of this multiplicity of banks, by admitting the existence of one general bank alone, having in most of the provincial towns branch establishments, where the notes of the bank would be paid on presentation. This idea is the most impracticable of all. With the inconveniences of the preceding plan, it combines a still greater inconvenience of its own; for it is evident that the bank, instead of merely holding in its principal treasury such portion of its capital as prudence might show to be necessary, would at the same time require to hold a similar portion in each of its branch establishments. But for this precaution, it would be in the power of evil-disposed persons to convey a considerable number of notes into any particular town in which there was a branch bank; even chance, or some circumstance impossible to foresee, might draw a great quantity of notes at one time into some particular branch bank, which might not be in a condition to honour them. If there were but fifty of these branch offices dispersed in different towns of the kingdom, the probability is, that there would be a failure of the bank in different places almost every day of the year, though the sums it held in cash, distributed among its different treasuries, might, in the aggregate, be very much beyond the whole demands made upon it.”
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“As to the banking plan which has been proposed to you by the Minister of Finance, and which, on that account, merits your deepest attention, I shall add little to the observations which have already been made in opposition to it. I shall confine myself to a single remark, which, however, I must confess, appears to me decisive. This plan is founded on the creation of a paper circulation not convertible into money at will, consequently, on the creation of a paper-money. Now, there do not exist, at least in my opinion, two ideas more opposed to each other than the existence of paper-money and of a bank: the one bears the character of constraint and authority, whilst the other, on the contrary, can be maintained only by the most free and unlimited confidence.
“Although I have thus shown, or at least mentioned, the inconveniences of most of the banking systems which have been proposed, it is not my intention to submit to you any plan of my own. I will, however, add a few observations bearing on the questions now under consideration. They may perhaps throw some light on principles which seem to me not sufficiently understood.
“The fundamental law of any bank whatever, is to fulfil its engagements when they fall due: I know of no other. If the particular position of the bank is such as to enable it to undertake engagements at sight, and payable at any moment, then this bank should be so regulated as to be at all times fully prepared to pay its engagements on presentation. Such is the rule which common sense would dictate.
“It is a common idea that the direct object of a bank is to throw notes into circulation. Undoubtedly the power of issuing notes is an immediate consequence of the credit of a bank; but we must beware of confounding this result with the real object of the institution of a banque de secours. When we seek a principle, we must of necessity disengage it from its consequences, however clear and direct they may be.
“The object of a bank composed of partners en commandite, like the caisse d’escompte, is to furnish assistance to commerce by bringing together funds to be applied to discounting good bills at a moderate rate of interest. When bills are presented for discount at this bank, the directors, provided they agree to give the accommodation, grant a bon, or order, to receive the cash at their treasury. The bearer of this order proceeds to the treasury, procures the cash, and carries it away. This is the natural course of proceeding, which was pursued at the commencement; but after going through the process of discounting paper repeatedly, and finding that the order on the treasury was always paid on presentation, it was soon perceived that it would be paid with equal punctuality on the following day, and that it was sometimes more convenient to carry home the order, and send for the cash when required. This order was next given in payment to some third party, who, being also aware of the exactness with which it would be paid, was in no hurry to present it; and thus, the knowledge of the punctual payment of the orders furnished by the directors of the bank upon their treasury produced in the end the effect, that everybody felt it to be a matter of indifference whether he held the note, or the cash which it represented.
“The consequence of this has been that those holding an interest in the establishment, finding that many parties abstained from sending for payment of the notes made payable at sight at the treasury, thought they were justified, when good bills were brought to them with dates not too distant, in discounting them with a part of the cash destined to meet their own notes. It is clear, however, that they could not properly employ for this purpose any portion of the cash beyond that which, in the nature of things, would not be demanded of them before the period fixed for the return of the money which had been advanced upon the bills they had discounted.
“So long as bank directors conform, in this respect, to the rules of prudence, their notes obtain such a degree of confidence, on account of the readiness with which they are handled and circulated, that cash is often brought for the purpose of buying notes on their treasury. If, on the contrary, abusing this confidence, and desirous of extending their transactions and their profits, they allow themselves at any time to alienate a portion of their funds, to such an amount as might subject them to the risk of being applied to for more cash than they possess, in that case there is at once an end of confidence. Thenceforward, their notes are looked upon only as paper, of which the payment is uncertain; and, as the business relations of the Banque de Secours connect its directors with all the bankers of the capital, and with almost all the branches of circulation in the kingdom, there arises a feeling of great distrust at home, and still greater abroad, which rapidly turns the exchange to our disadvantage, and leads to a restriction of the currency and all the evils resulting therefrom.
“What, then, should be the conduct of the directors of such an establishment at periods when confidence is shaken? Their course is very simple. They ought to know that at those times they may be applied to for payment of a portion of their notes, perhaps of all. They ought, therefore, to use only an unimportant portion, or even none, of the funds in their treasury destined to redeem their notes.
“It would be absurd, therefore, for the directors of a Banque de Secours to pretend there was nothing wrong in its management so long as they should maintain in their treasury an amount of cash equivalent to the third or fourth part of the amount of their notes in circulation. In this respect, it is impossible to fix any absolute proportion. It is necessary that the directors of a bank should possess a sufficient degree of foresight to provide themselves, not with a fourth or a third, but with a half, or three fourths, or even the whole amount of the funds representing the notes, whenever any corresponding number of notes are likely to be presented for payment.
“But, it may be said, the bank would in that case make no profit. To this I reply, that the chief object of the protection which the government or the nation may grant to a Banque de Secours, is not to enable those holding an interest in the bank to make, under all possible circumstances, considerable and uninterrupted profits. Undoubtedly the nation should desire to see the bank prosper, because it is by profit alone that the interested parties can be induced to maintain an establishment of the sort, and because the existence of such an establishment is useful in a state; but the nation has no interest in desiring more than that the shareholders should make such profits as are sufficient to induce them to carry on the bank.”
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“At periods when confidence is shaken, it is necessary for a public bank to restrict its operations. The directors of such an establishment would be very imprudent, or even culpable, if, instead of resigning themselves to bear their portion of the misfortunes of the times, they were to persist, contrary to the natural course of things, in giving always an equal extension to their operations, at the risk of being at length compelled to come to a stop.
“The Caisse d’Escompte seems to have fallen into some of these difficulties, and to have failed to recognise the fundamental principle of all banks, which consists in never failing to meet engagements.”
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“The Caisse d’Escompte has undoubtedly transgressed the rules prescribed to it; and yet it is, perhaps, allowable not to weigh its conduct in an ordinary balance. It had furnished money which, doubtless, it had not the right to furnish, because it did not belong to it; but it has given that assistance in a crisis which has baffled all human foresight, and out of deference to a minister in whom the nation has so justly placed confidence. It is not necessary that the Assembly should convert the Caisse d’Escompte into a national bank, but it is unquestionably necessary that it should keep account of its advances with the Caisse.”
“M. Necker’s suggestion on this point does not, I must confess, appear to me to attain the object desired. I can recognise no real payment in paper-money, or, if there is a real payment, I see in it a preference accorded to the Caisse d’Escompte, which may have the appearance of an injustice to the other creditors of the state. Why create a paper-money specially in favour of the Caisse d’Escompte, and leave other parties to suffer whose claims upon the nation are at least as sacred?”
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“The claims of the Caisse d’Escompte are not less sacred than those of others, I grant, but neither are they more so. I will not, therefore, recommend you to create paper-money for the other creditors, as well as for the Caisse, but I would conjure you not to create it at all. The inevitable effect of all paper-money is, as you know, the rapid disappearance of cash. The fictitious currency drives away the real; and as the former can never be a perfectly exact representation of the latter, it happens that it drives away far more than it replaces. From that moment the paper no longer maintains an equality with cash; it falls below par, and hence the most fatal consequences. All the creditors who receive payment in notes lose the difference, while, on the other hand, all the debtors to whom cash had been advanced, gain the difference, and hence arise a destruction of property and a general want of faith in payments—a want of faith the more odious as it has the sanction of legality. Moreover, as soon as one set of engagements between individuals is settled, fresh ones will be formed, or there would be an end of all business transactions; and here recommences, in an opposite direction, an operation no less fatal, no less convulsive, by which the creditors, in their turn, will ruin the debtors. Fearing a repayment in notes, and adding by anticipation the present loss upon those notes to the still greater loss which they expect may afterwards be incurred, they swell out their claims to an unreasonable extent. Thus they entail the ruin of their debtors when the time arrives at which there shall be no more notes, or when confidence shall have brought them to an equality with cash. It is evident that this is not a reparation of the injustice first alluded to, but an entirely new species of injustice, inasmuch as there is neither the same proportion, nor the same contracting parties, nor the same engagements.”
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“The more we reflect on the true principles of credit, the more are we convinced that there exists in this respect no difference between a nation and a private individual. A nation, like a private person, possesses credit only so long as it is known to have the will and the power to pay. A nation, like an individual, can do nothing better towards its creditors than to pay in ready money its engagements when due. If, through some unfortunate circumstances, the means of payment in cash are wanting, the best—the only course which a nation, like an individual, can then adopt, is to propose to its creditors only such arrangements as are secure of being carried into effect, for nothing destroys confidence like exaggerated promises.”
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“Rest assured that every mechanical means of bringing about the re-appearance of specie, such as the melting down of plate, the purchase of materials at a great expense, or other such temporary expedients, though they may afford the appearance of relief, have really nothing substantial or durable in their nature. When once the public feeling leads to the hoarding or the exportation of specie, that which you produce in this way will speedily be withdrawn from the circulation like the rest. It is only by securing public opinion, and by furnishing irresistible motives of confidence, that credit can be ensured; and those who fear that, even after the restoration of order, the specie which seems to have vanished from among us will not re-appear, are mistaken. Gold and silver are necessarily transported, like other articles of merchandize, wherever there exist the will and the power to pay for them; they are even transported more readily by reason of the ease with which they are removed. So long as the nation has a surplus to dispose of, the gold and silver required will always be procured; for it must not be forgotten that, if gold and silver are the purchasing medium for all other things, all other things are equally the purchasing medium for those metals. For a nation which has nothing to give, there can be nothing to obtain; but those nations which have an immense surplus, cannot long want anything which may be purchased, and, least of all, gold and silver.
“Since the position of your finances compels you to be the debtors of other nations, prove yourselves to be the best possible debtors; you have the means to do so. Only show that you know how to set about it, and you will soon see flowing into the country the capital of the foreigner, who only awaits that moment to come and exchange it for your effects. You will see immense sums brought to light which are at present yielding nothing, and which would be gladly exchanged for productive securities bearing annual interest, when once it is felt that the payment of that interest is certain, and that the capital will not be endangered.”
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In conclusion, the Bishop of Autun submitted to the National Assembly a series of articles having for their object the establishment of a sinking fund for the gradual extinction of the public debt, the means of raising the necessary portions of which for each succeeding year were to be determined at the commencement of each session of the legislature.