Chap. III : Of Banks

In deducing the principles of banks, I shall do the best I can to go through the subject systematically.

I have divided credit into three branches, private, mercantile, and public. This distribution will be of use on many occasions, and shall be followed as far as it will go, consistently with perspicuity: but, as has been often observed, subjects of a complex nature cannot be brought under the influence of a few general principles, without running into the modern vice of forming systems, by wire-drawing many relations in order to make them answer.

The great operations of domestic circulation may be better discovered by an examination into the principles upon which we find banking established, than by any other method I can contrive. It has been by inquiring into the nature of those banks which are the most remarkable in Europe, that I have gathered the little knowledge I have of the theory of domestic circulation. This induces me to think that the best way to communicate my thoughts on this subject, is to lay down the result of my inquiries relatively to the very object of them.

After comparing the operations of different banks in promoting circulation, I find I can divide them, as to their policy, into two general classes, viz. those which issue notes payable in coin to bearer; and those which only transfer the credit written down in their books from one person to another.

Those which issue notes, I call banks of circulation; those which transfer their credit, I call banks of deposit.

Both indeed may be called banks of circulation, because by their means circulation is facilitated; but, as different terms serve to distinguish ideas different in themselves, these I here employ will answer the purpose as well as any others, when once they are defined; and circulation undoubtedly reaps far greater advantages from banks which issue notes transferable every where, than from banks which only transfer their credit on the very spot where the books are kept.

I shall, according to this distribution, first explain the principles upon which the banks of circulation are constituted and conducted, before I treat of the others.

This will lead me to avail myself of the division I have made of credit, into private, mercantile, and public; because, according to the purposes for which a bank is established, the ground of confidence, that is, the credit of the bank, comes to rest upon one or other of them.

In countries where trade and industry are in their infancy, credit can be but little known; consequently, they who have solid property, must find great difficulty in turning it into money; without money, again, industry cannot be carried on, as we have abundantly explained in the 26th chapter of the second book; consequently without credit the whole plan of national improvement will be disappointed.

Under such circumstances, it is proper to establish a bank upon the principles of private credit. This bank must issue notes upon land and other securities, and the profits of it must arise from the permanent interest drawn for the money lent.

Of this nature are the banks of Scotland. To them the improvement of this country is entirely owing; and until they are generally established in other countries of Europe, where trade and industry are little known, it will be very difficult to set these great engines to work.

Although I have represented this species of banks, which I shall call banks of circulation upon mortgage, as peculiarly well adapted to countries where industry and trade are in their infancy, their usefulness to all nations, who have upon an average a favourable balance upon their trade, will sufficiently appear upon an examination of the principles upon which they are established.

It is for this reason that I have applied myself to reduce to principles the many operations of the Scotch banks, during the time they were in the greatest distress imaginable, from the heavy balance the country owed during the last years of the late war, and for some time after the peace in 1763. By this I flatter myself to do a particular service to Scotland, as well as to suggest hints which may prove useful, not to England only, but to all commercial countries, who, by imitating this establishment, will reap advantages of which they are at present deprived.

For these reasons, I hope the detail I shall enter into with regard to Scotland, will not appear tedious, both from the variety of CUriOus combinations it will contain, as also from the lights it will cast upon the whole doctrine of circulation, which is the present object of our attention.

In countries where trade is established, industry flourishing, credit extensive, circulation copious and rapid, as is the case with England, banks upon mortgage, however useful they may prove for other purposes, would not answer the demands of the trade of London, and the service of government, so well as the bank of England.

The ruling principle of this bank, and the ground of their confidence, is mercantile credit. The bank of England does not lend upon mortgage, nor personal security: their profits arise from discounting bills; loans to government, upon the faith of taxes, to be paid within the year; and upon the credit cash of those who deal with them.

A bank such as that of England, cannot therefore be established, except in a great wealthy mercantile city, where the accumulation of the smallest profits amount, at the end of the year, to very considerable sums.

In France, under the regency of the Duke of Orleans, there was a bank erected upon the principles of public credit. The ground of confidence there, and the only security for all the paper they issued, were the funds appropriated for the payment of the interest of the public debts.

It is for the sake of order and method, that I propose to explain the principles of banking, according to this distribution. I must however confess, that although I represent each of the three kinds of banks as having a cause of confidence peculiar to itself, to wit, either private, mercantile, or public credit; yet we shall find a mixture of all the three species of credit entering into the combination of every one of them.

Banking, in the age we live, is that branch of credit which best deserves the attention of a statesman. Upon the right establishment of banks, depends the prosperity of trade, and the equable course of circulation. By them(1*) solid property may be melted down. By the means of banks, money may be constantly kept at a due proportion to alienation. If alienation increase, more property may be melted down. If it diminish, the quantity of money stagnating, wil1 be absorbed by the bank, and part of the property formerly melted down in the securities granted to them, will be, as it were, consolidated anew. Banks must pay, as agents for the country, the balance of their trade with foreign nations. Banks keep the mints at work; and it is by their means, principally, that private, mercantile, and public credit are supported. I can point out the utility of banks in no way so striking, as to recal to mind the surprising effects of Mr Law's bank, established in France, at a time when there was neither money or credit in the kingdom. The superior genius of this man produced, in two years time, the most surprising effects imaginable; he revived industry; he established confidence; and shewed to the world, that while the landed property of a nation is in the hands of the inhabitants, and while the lower classes are willing to be industrious, money never can be wanting. I must now proceed in order, towards the investigation of the principles which influence this intricate and complicated branch of my subject.