Reminiscences of Prince Talleyrand, Volume 2 (of 2)

by active 19th century M. Colmache

* * * * *

“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.