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 great quantity of paper money dispersed had sunk the rate of interest to 2 per cent. The dividend, therefore, combined with the rate of interest, carried the market price of the action to 10 000 livres. Here was a new fund provided as an outlet for all the bank notes paid to the creditors; and in proportion as they bought the actions from the Regent, or the company, whom I here consider as the same, the notes were to be cancelled.

By this operation all the debts of France were to be converted into actions of the company of the Indies, and were to share its fate. But then it must be remembred, that this company had in a manner the whole revenue of France in farm; and by a recapitulation of the different branches of their profits, their income amounted to eighty millions of livres a year. So that if matters had been well managed, had credit been supported by fair dealing, had no arbitrary acts of power, in tampering with denominations of coin and money, taken place, and had the Regent supported and encouraged the company; they in fact might have been able to pay more than all that was required of them; and the very diminution of the interest of the public debts, by the fall of money to 2 per cent. was, in effect, cutting off one half of the capital. So that if we suppose the total value of the 2000 millions of debt equal to 100 millions sterling, the debts of France, by this scheme, would have been reduced to an annuity of 2 per cent. on a 100 millions, or two millions sterling a year paid to the company, who then represented the creditors of the nation.

But the project was too great; the capacity of those who were in the management was too small, and the time was too short for bringing about so great a revolution: thus it failed; but in a way which suggests no reason to believe that it might not have been supported.

Chap. XXXIV. The denomination of the paper was reduced to one half by an act of power: a man who, for example, had a bank note for 100l. had it reduced to 50l. This at once destroyed the whole credit of France. But it would have stood its ground, without doubt, had the Regent called the fifty pounds with which he paid such a note, one hundred pounds; although, if you abstract from the interests of debtors and creditors, which never were attended to, it was absolutely the same thing. The altering the denomination of paper implies, however, this additional injustice above that of altering the denomination of coin, that it changes the value of the paper in all cases; because it contains no other value than the denomination: whereas coin has a value independent of that, which no law can alter.

Chap. XXXV. The form of a bank proposed for France, in this chapter, is pretty much the same with that mentioned in chap. 16; only here I have not even admitted the payment of the interest in coin, for fear that an act of power, by carrying off a few thousand louis d’ors on a present exigency, might totally ruin the credit of such a bank, and consequently draw ruin on the whole nation.

This bank is intended merely as an office for keeping accounts between people of property, and thereby of greatly increasing and supporting circulation.

Chap. XXXVI. Having dismissed the subject of banks of circulation, I come next to those of deposit. Here I deduce the principles upon which the bank of Amsterdam is established.

This bank issues no paper, and grants credit upon no security but coin locked up in their vaults. Consequently, the ground of their credit is the faithful preservation of this coin. Were it at any time to be diminished below the value of the credits written in their books, the nature of the bank would be changed. Were the coin to be lent on good security, such a bank would then immediately become a bank of circulation upon mortgage; since it would be the same as if the credit had been at first granted upon that security. Were the coin disposed of for no value, the bank would be from that moment bankrupt in fact, although the secret might be kept for a long time.

Chap. XXXVII. The intention of establishing a bank of this nature at Amsterdam was to fix the seat of trade in that city. The ordering all bills of exchange to be paid to the bank in coin, and the giving to the holders of the bills only a credit in bank for the value, was an effectual means of obliging the proprietors of that credit to carry on their trade in the place where their funds were established beyond a possibility of removing them, except by transferring them to others who, by accepting of the transfer, came under the same necessity. Were indeed trade to become incompatible with the situation of the city, as if an earthquake should fill up the port, then the bank would either be removed elsewhere, or the credit writ in their books would become of no more value than gold in an inaccessible mine. This regulation also prevented the circulation of bad coin; because when payment of bills was made to the bank, they took care that nothing but good coin should be received.

From these regulations it appears that money cannot be multiplied by banks of deposit; but on the other hand, it cannot be diminished by exportation, without the act of the bank; and the transfer of credit answers every use of coin in trade, and prevents also its waste in circulation.