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

In every question relative to this subject, we must return to principles. This is the only sure method of avoiding error. The intelligent reader, therefore, must excuse short repetitions, and consider them as a sacrifice he is making to those of slower capacities, to whom they are useful.

The principle of banking upon mortgage, is to lend and give credit to those who have property, and a desire to melt it down. This is calculated for the benefit of trade, and for an encouragement to industry. If such banks, therefore, borrow, it must be done consistently with the principles upon which their banking is founded. If the borrowing should tend to destroy those advantages which their lending had procured, then the operation is contrary to principles, and abusive. So much for recapitulation.

While trade flourishes and brings in a balance, banks never have occasion to borrow; it is then they lend and give credit. This, I believe, we may take for granted.

When the country where the bank is established begins to owe a balance to other nations, the bank, as we have seen in the last chapter, is obliged to pay it in coin or in bills. We have there shewn, that in such cases it is inconsistent with their principles and interest, to withhold lending and giving credit, so far as is necessary for keeping up the fund of circulation to that standard which alienation and ready money demands require.

To refuse credit, and at the same time to borrow at home, must then, at first sight, appear to be doubly inconsistent. But in order to set this point in the clearest light I am capable, I shall reason upon a supposition analogous to the situation of the Scotch banks, and by that means avoid abstraction as much as I can.

Let me then suppose that Scotland, during the last years of the war ended in 1763, and ever since (I write in 1764) from the unavoidable distress of the times, was obliged, 1. to import considerable quantities of grain in some bad years; 2. to refund the English loans of money settled there in former times; 3. to furnish some of the inhabitants with funds, which they thought fit to place in England; 4. to pay the amount of additional taxes imposed during the war; while, at the same time, several of the ordinary resources were withdrawn; such as, 1. a great part of the industrious inhabitants who went to supply the fleets and armies; 2. the absence of the ordinary contingent of troops; and 3. the cutting off several beneficial articles of commerce. Let me suppose, I say, that from a combination of these losses incurred, and advantages suspended, Scotland has lost annually, for eight years past, two hundred thousand pounds. I am no competent judge of the exactness of this estimate, it is of no consequence to the argument; but I think I am far beyond the true computation.

On the other hand, let me suppose, that the sum of currency in paper, sufficient (with the little coin there was) to circulate the whole of the alienations in Scotland, (that is to say, the whole domestic circulation, supposing no balance to be owing to England or other countries) to be one million sterling. I am persuaded I am here below the true estimate, but no matter.

Is it not evident, from this supposition, and from the principles we have been deducing, that unless the banks of Scotland had alienated annually in favour of England, a fund for paying the interest of two hundred thousand pounds capital, and either brought down the coin, or given bills on London for the sum of that capital every year; that the million of Scots currency would have been diminished in proportion to the deficiency; and would not the consequence of that be, cæteris paribus, to bring the currency below the demand for it; and, consequently, to hurt trade, industry, and alienation?

Now supposing the banks, instead of providing, in England, a fund equal to this grand balance, (as I have said they should do) to remain in consternation and inactivity, giving the whole of their attention to the providing coin and bills to supply the demand of exchangers, whose business it is to send out this annual balance; what will the consequence be?

I answer, that if the banks, in such a case, do not follow the plan I have proposed, the consequence will be, that two hundred thousand pounds of their paper will be, the first year, taken out of the domestic circulation of Scotland; will be carried to the bank, and coin demanded for it. If the coin is found in the bank, it is well; it goes away, and leaves the paper circulation of Scotland at 800,000l. This void must occasion applications to the bank for credits to supply it. Is it not then the interest of the bank to supply it? We have said in the former chapters that it is. But now let us suppose it objected, that if banks should issue notes at such a time, their cash having been exhausted, they would be obliged to stop altogether, upon a return of those notes issued upon additional credits.