Part II. Of Banks.
Chap. I. Having deduced the principles which regulate the rate of interest, I proceed to investigate those which influence domestic circulation; and as banks are the great engine by which circulation is carried on, in tracing the nature of banks we shall fully understand its policy and principles.
Banks either circulate notes, or transfer credit written in their books: the first are called banks of circulation; the latter banks of deposit.
All banks are founded on credit, and according to the nature of their institution, I may divide the credit they are built on into three kinds, viz. private, mercantile, and public.
Private credit is when the ground of confidence is real property, pledged for the security of the loan.
Mercantile credit is when the cause of confidence is in the trading stock, abilities, integrity, and good fortune of the person who obtains it.
Public credit every one understands. It is when the ground of confidence is a fund secured by public faith, in favour of the creditors, for the interest and capital due, which last however is never exigible from the state.
Private credit is the most solid of the three; mercantile credit is the most precarious; and public credit depends entirely upon the maxims of every government with regard to public faith.
It is the object of confidence, not the quality of the person obtaining credit, which determines the nature of the credit. A merchant may grant bond on the credit of his lands; a landed man’s bill, as member of a mercantile company, may only affect his stock in trade, and a Prince may pledge a province for a sum of money.