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

But as the stock of the bank is of a determinate value, and as the notes they issue may very far exceed it, the credit of a bank will be precarious, unless the value of the securities upon which they lend, be equal to all the notes in circulation. It will also be precarious in proportion as the securities themselves are so. Hence the interest the public has to take care that banks give credit upon nothing but the best security.

Chap. V. A bank, therefore, which lays down a rule to lend upon the mortgage of solid property only, would destroy confidence, if it should launch out in giving credit to those who have no solid property to pledge.

Chap. VI. The use of all banks is to support domestic circulation: this is two-fold; that carried on by consumers, and that carried on by traders and manufacturers, who supply consumption.

The circulation carried on among the first is in proportion to their income, and their credit should be in proportion to the funds which produce it. The circulation carried on by the last is in proportion to the demand for their industry.

If a bank be established on the credit of solid funds, it is very plain that they cannot support the circulation of manufacturers and dealers upon the same terms, or in the same way they do that of proprietors. They may indeed discount bills; but they cannot give a permanent credit upon a security which is not founded upon property. This opens a new combination.

Trade and industry are dispersed through many hands, and if the stock of those who carry them on be compared with what is necessary for that purpose, it will appear very small. What is deficient in stock must be made up to them in credit; and this will be in proportion to their integrity, capacity, and good fortune. A frail security for paper, which is to become the money of a nation! Such securities must either be rejected by every bank whatever, or the whole fabric will tumble into ruin. But this subaltern class of dealers may have recourse to merchants, whose wealth and funds are solid and extensive. To these a bank may give credit, and they again, in their dealings with the other class, may indemnify themselves of all the risk they run, by profits in proportion to it.

This class of merchants I call exchangers; because they deal principally by bills of exchange in the credits they give, which are of the greatest advantage to an infant trade and a growing industry.

Chap. VII. When banks were first established, there was no money known but coin, and many there still are, who do not clearly see how money can possibly be made of any thing but metal. The scarcity of coin raised the rate of interest, and when banks began to lend their paper, they exacted the same interest as if they had been lending coin. Hence they were obliged to promise payment of their notes, in coin, upon demand. In consequence of this, the policy of circulation proceeds upon the supposition, that bank notes are equal to coin in every respect; and when any interruption happens in the ready exchanging them at the bank, all runs into confusion. I shall afterwards shew how this might be prevented.

While a country has a balance of trade, either at par or in her favour, no body has occasion for coin, except to reduce bank notes to their lowest denomination of money. But when a balance is due to other nations which must be paid in gold and silver, every one who wants coin for that purpose, runs to the banks, which are obliged to pay in it, and then they are thrown into distress. Hence we may conclude, that a bank taking upon itself the obligation of paying in coin, without carrying its policy farther than the banking trade, cannot stand its ground in a country which owes, upon an average, a balance to other nations. This opens a new and a most curious combination.

Chap. VIII. In the mechanical operations of trade, when they are not combined upon principles, and directed by a superior policy, every balance due from one nation to another upon the whole of their reciprocal payments, that is, in consequence of their debts and expences abroad, as well as in the course of their mercantile operations, must be paid in the metals.