Chap. IV. A scarcity of money only being found to stop the progress of industry, and thereby to circumscribe the gains of merchants who supply consumption; and they perceiving that men of property become bad customers, more from the impossibility of making payments than for want of an inclination to consume, joined together, and formed a considerable stock which they exposed to the eyes of the public. This gave them credit, and every one who had money to lend was fond of placing it in their hands. Other people who wanted to borrow, applied to them for money. Their answer was, we have no coin; but if you want money for any purpose, we can assist you in credit, if you will give us security upon your estate. Here is, said they, a note of ours, which any body will take from you as payment for what you want. This was the same thing to the man who wanted money for a particular use, as if they had given him coin; and as such demands became frequent, the notes were printed, and insensibly banking was established.
States perceiving the abuse which might follow, were every one allowed to issue paper in this manner, judged it proper to erect companies, who lent them considerable sums as a security for their faith to the public; and the superior credit of such companies drew the confidence of the public, and circumscribed the dealings of individuals. Thus the trade of Lombards, who had formerly supported circulation by their bills of exchange payable to order, received a farther extension by the establishment of banks, who, by issuing notes payable to bearer, rendred them, in all commercial countries, every bit as useful as any coin.
Banks once established, regulations became necessary; and of these the first and fundamental one, was, to issue no notes but upon good security. If it be asked, what security should be taken? The answer is, the best those who want credit can give. In a country where trade and industry are little known, but where a taste for refinement is taking place, demand must be encouraged, in order to augment the supply. And as this demand for consumption should, naturally, come from men of landed property; the bank, therefore, should first resolve to issue notes upon the security of that kind of property.
When industry becomes more extended, and when trade becomes more secure, from the solidity of mercantile funds, banks may then begin to discount bills of exchange, and as this branch of credit enlarges, the bank will by degrees participate of the nature of those secured upon mercantile credit.
When public credit, again, is well established, they will lend upon government securities, pledged in their hands, and thus become founded upon public credit.
According therefore to the principal object of their trade, they are said to stand upon private, mercantile, or public credit.
When a proprietor of lands gives his bond to a bank, it should be understood, that as long as he regularly pays the interest of the money borrowed, the bank is not to demand the capital.
For this bond they give notes, which are considered as ready money, and therefore carry no interest. So the profit of the bank is to receive interest for what they lend, and to pay none for what they owe.
What they owe is the paper they issue. They owe this to the public; and the security which the public has, is the security which the bank received from the person who borrowed from them.
Hence the solidity of banks upon mortgage. Their notes become money, and this money is secured upon the whole stock of the bank, and the whole property engaged to them.