Chap. I: Of the various Kinds of Credit

We have already pointed out the nature of credit, which is confidence; and we have deduced the principles which influence the rate of interest, the essential requisite for its support.

We come now to treat of domestic circulation; where we are to deduce the principles of banking. This is the great engine calculated for carrying it on.

That I may, with order, investigate the many combinations we shall here meet with, I must point out wherein banks differ from one another in point of policy, as well as in the principle upon which their credit is built.

If they be considered relatively to their policy, they may be divided into banks of circulation, and banks of deposit.

If they be considered relatively to the principles upon which their credit is built, they may be divided into banks upon private credit, banks upon mercantile credit, and banks upon public credit.

It is to this last division only I must attend, in the distribution of what is to follow; and therefore it is proper to set out by explaining what I understand by the terms I have here introduced.

First, private credit. This is established upon a security, real or personal, of value sufficient to make good the obligation of repayment both of capital and interest. This is the most solid of all.

Secondly, mercantile credit. This is established upon the confidence the lender has, that the borrower, from his integrity and knowledge in trade, may be able to replace the capital advanced, and the interest due during the advance, in terms of the agreement. This is the most precarious of all.

Thirdly, public credit. This is established upon the confidence reposed in a state, or body politic, who borrow money upon condition that the capital shall not be demandable; but that a certain proportional part of the sum shall be annually paid, either in lieu of interest, or in extinction of part of the capital; for the security of which, a permanent annual fund is appropriated, with a liberty, however, to the state to free itself at pleasure, upon repaying the whole; when nothing to the contrary is stipulated.

The solidity of this species of credit depends upon circumstances.

The difference between the three kinds of credit lies more in the object of the confidence, and the nature of the security, than in the condition of the borrower. Either a private man, a merchant, or a state, may pledge, for the security of a loan, a real or a moveable security, with an obligation to refund the capital. In this case, the obligation stands upon the solid basis of private credit.

Either a private man, a merchant, or a state, may strike out projects which carry a favourable appearance of success, and thereupon borrow considerable sums of money, repayable with interest. In this case, the obligation stands upon a mercantile credit.

Either a private man, a merchant, or a state, may pledge (for the security of money borrowed) a perpetual annual income, the fund of which is not their property, without any obligation to refund the capital: such obligations stand upon the principles of public credit.

I allow there is a great resemblance between the three species of credit here enumerated: there are however some characteristic differences between them.

First, in the difficulty of establishing and supporting them.

Private credit is inseparable, in some degree, from human society. We find it subsisting in all ages: the security is palpable, and the principles on which it is built are simple and easy to be comprehended. Public credit is but a late invention: it is the infant of commerce, and of extensive circulation. It has supplied the place of the treasures of old, which were constant and ready resources to statesmen in cases of public distress: the security is not palpable, nor readily understood, by the multitude; because it rests upon the stability of certain fundamental maxims of government. Mercantile credit is still more difficult to be established; because the security is the most precarious of any; it depends upon opinion and speculation, more than upon a determinate fund provided for repayment of either capital or interest.

Secondly, they differ in the nature of the security and object of confidence.

Private credit has a determinate object of confidence, viz. the real existence of a value in the hands of the debtor, sufficient to acquit both capital and interest. Public credit has the visible security of a fund appropriated for the perpetual payment of the interest. Mercantile credit depends wholly upon the integrity, capacity, and good fortune of the debtor.

The third difference is with regard to the ease of transfer.

All public debts stand generally on the same bottom. No part of the same fund is better than another: the price of them is publicly known, and the securities are laid in the most convenient way for transfer, that is, for circulation, without consent of the debtor. This is far from being the case in private securities. Nor is it the case in the mercantile, except in bills payable to order or to bearer; in which cases alone, the creditor can effectually transfer without the consent of the debtor.

The fourth difference is discovered in the stability of the confidence.

Nothing can shake private credit, but an appearance of insolvency in the very debtor. But the bankruptcy of one considerable merchant, may give a shock to mercantile credit all over Europe: and nothing will hurt public credit, as long as the stipulated interest continues regularly to be paid, and as long as the funds appropriated for this payment remain entire.

From what has been said, I hope the three species of credit have been sufficiently explained; and, from what is to follow, we shall feel the utility of this distribution.