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

The first thing to be done is to point out the immediate effects which resulted upon diminishing the denomination of the paper; because the destruction of the credit of France was not the immediate consequence of this arret; but the ultimate effect of a chain of consequences which followed indeed very quick upon one another.

The paper had been declared, against the opinion of Mr. Law, by an Arret de Conseil of the 22d of April 1719, une monnoie fixe, as has been said. Consequently, any diminution of its denomination was a plain infraction of the public faith. From this declaration in the arret of the 22d of April 1719, the public reaped one notable advantage, which was, that in borrowing and lending paper, every one was sure that the obligations contracted could be dissolved by restoring the very same species of property which had been received; but by diminishing the denomination of it, by the arret of the 21st of May 1720, all such as were debtors, became obliged to discharge their debts at the expence of double the sum of paper borrowed.

The immediate consequence, therefore, of touching the denomination of the paper, was, to shew the public that their fortunes in paper were liable to the same inconveniences as fortunes in specie; that is, that they might be increased or diminished at pleasure. Upon this it was very natural for every one to endeavour to realize his paper, and put it into coin: since, in pari casu, it was better to have it in that which had some intrinsic value, than in that which had none at all.

Of all the French paper, the notes were the most easily realized; because there was contained in them a direct obligation upon the bank to pay them in coin. The actions again were more difficult to be converted; because in order to realize them, it was necessary to find people who were willing to give either notes or coin for them.

A run upon the bank, therefore, taking place, upon the arret of the 21st of May, it was obliged to stop payment: this occasioned a general alarm, and destroyed the confidence which the public had had in the state, which is what we mean by public credit.

This point explained, it remains to shew why the augmentations and diminutions upon the specie should not have ruined the credit of the paper.

1mo, The operations upon the specie affected the paper only indirectly; but the diminution upon the paper affected it directly.

The operations upon the specie only affected that part of the paper which was made to circulate as an equivalent for the specie; or in other words, that part which people realized, either, 1. with an intention to withdraw their funds altogether out of the scheme; or 2. to profit of the operations upon the specie; or in the last place, to procure small sums of money for common expences.

Now as to the first, the number of those who wished to withdraw their stocks were inconsiderable, in proportion to the stock-jobbers; and therefore their interest could not affect the general credit; and the last was inconsiderable in every respect.

As to the second, the government made it very difficult for the proprietors of notes to profit of the operations upon the coin. When it was to be diminished, the diminutions were advertised some time before they took place, and the diminution went on always by degrees. Thus people who had paper, with which they could trade in buying actions, constantly rising in their value, by the intrigues of the state, when at the same time the denominations of the coin were diminishing, did not carry their notes to the bank for two reasons.