An Inquiry into the Principles of Political Oeconomy (Vol. 2 of 2) / Being an essay on the science of domestic policy in free nations. In which are particularly considered population, agriculture, trade, industry, money, coin, interest, circulation, banks, exchange, public credit, and taxes

by Sir James Steuart

We have said, that the credit of such banks ought to be established upon the principles of private securities only. If their notes be issued upon solid property, then no rebellion can influence them: but of this more hereafter.

But banks in prosperous trading nations sit down with casual and temporary inconveniencies; and exchangers carry on a profitable trade, whether the nation be gaining or losing all the while. For such nations, and such only, are banks advantageous. Were banks established in Spain, Portugal, or any other country which pays a constant balance from the produce of their mines, they would only help on their ruin a little faster.

In the infancy of banking, and in countries where the true principles of the trade are not well understood, we find banks taking a general alarm, whenever a wrong balance of trade occasions a run upon them. This terror drives them to expedients for supporting their credit, which we are now to examine, and which we shall find to have a quite contrary tendency.

The better to explain this combination, we must recall to mind, that the payment of the grand balance in coin or bills is unavoidable to banks. We have said that this balance is commonly paid by exchangers, who pick up the coin in circulation; a thing the bank cannot prevent. This we have called exhausting a part of (B): the consequence of this is, to make the proprietors of (C) come upon the bank, and demand coin for filling up (B): to this the bank must also agree. But by these operations (C) comes to be diminished, below the level necessary for carrying on trade, industry, and alienation: upon which I have said there commonly comes an application to the bank to give more credit, in order to support domestic circulation, which if complied with, more solid property is consequently melted down.

This swells the mass of securities, and raises (A) to its former level. But here the bank has an option to refuse more credit: in the former operations it had none. Now if the bank, from a terror of being drained of coin, should refuse to issue notes upon new credits, for the demands of domestic circulation; in this case, I say, they fail in their duty to the nation, as banks, and hurt their own interest. As to their duty to the nation, I shall not insist upon it; but I think I can demonstrate that they fail in point of combination, with respect to their own interest, and that is enough.

I say, then, that as long as there is one single note in circulation, and any part of a grand balance owing, that note will come upon the bank for payment, without a possibility of its avoiding the demand. Refusing therefore credit, while any notes remain in the hands of the public, is refusing an interest which may help to make up the past losses: but of this more hereafter.

In the next place, I think I have demonstrated, that so soon as the grand balance is paid, it is impossible that any more demands for coin can come upon the bank for exportation. Why then should a bank do so signal a prejudice to their country, as to refuse to lend them paper, which the ready-money demands of the country must suspend in circulation? And why do this at so great a loss to themselves? It has been said above, and I think with justice, that this recruit, issued to fill up circulation, adds to the mass of bank securities, and very properly represents that part of the income of the solid property of the country, which the bank must dispose of to foreigners, in order to procure from them the coin or bills necessary for answering the demand of payment of a grand balance.

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

A bank is forced to pay to the last farthing of this balance; by paying it, the notes that were necessary for circulation are returned to them; and they refuse to replace them, for fear that their supplying circulation should create a new balance against them! This is voluntarily taking on themselves all the loss of banking, and rejecting the advantages.

Such management can only be prudent when the circulating notes of a bank are very few, and when the balance is very great. In that case, indeed, were the thing possible, it might be prudent to give over banking for a while, till matters took a favourable turn. But if we suppose their notes to exceed the balance due, then all the hurt which can be done is done already; and the more notes are issued, and the more credit is given, so much the better; because the interest upon all that is issued above the balance, must be clear profit to the bank.