Chap. IV

Banks of circulation upon mortgage or private credit, are those which issue notes upon private security, payable to bearer on demand, in the current coin of the nation. They are constituted in the following manner.

A number of men of property join together in a contract of banking, either ratified or not by public authority, according to circumstances. For this purpose, they form a stock which may consist indifferently of any species of property. This fund is engaged to all the creditors of the company, as a security for the notes they propose to issue. So soon as confidence is established with the public, they grant credits, or cash accompts, upon good security; concerning which they make the proper regulations. In proportion to the notes issued in consequence of these credits, they provide a sum of coin, such as they judge to be sufficient to answer such notes as shall return upon them for payment. Nothing but experience can enable them to determine the proportion between the coin to be kept in their coffers, and the paper in circulation. This proportion varies even according to circumstances, as we shall afterwards observe.

The profits of the bank proceed from the interest paid upon all the money advanced by the bank, in consequence of credits given.(2*)

Out of these profits must be deducted, first, the charge of management; secondly, the loss of interest for all the coin they preserve in their coffers, as well as the expence they are put to in prodding it; and thirdly, the expence of transacting and paying all balances due to other nations.

In proportion, therefore, as the interest upon the money advanced by the bank in consequence of the securities, exceeds the loss of interest on the coin in the bank, the expence of management, and of prodding funds abroad to pay balances, in the same proportion is their profit; which they may either divide, accumulate, or employ, as they think fit.

Let it be observed, that I do not consider the original bank stock, or the interest arising from that, as any part of the profits of the bank. So far as it regards the bank, it is their original property; and so far as it regards the public, it serves for a collateral security to it, for the notes issued. It becomes a pledge, as it were, for the faithful discharge of the trust reposed in the bank: without such a pledge, the public could have no security to indemnify it, in case the bank should issue notes for no permanent value received. This would be the case, if they thought fit to issue their paper either in payment of their own private debts, or for articles of present consumption, or in a precarious trade.

When paper is issued by a bank for no value received, the security of such paper stands upon the original capital of the bank alone; whereas when it is issued for value received, that value is the security on which it immediately stands, and the bank stock is, properly speaking, only subsidiary.

I have dwelt the longer upon this circumstance, because many, who are unacquainted with the nature of banks, have a difficulty to comprehend how they should ever be at a loss for money, as they have a mint of their own, which requires nothing but paper and ink to create millions. But if they consider the principles of banking, they will find that every note issued for value consumed, instead of value received and preserved, is neither more or less, than a partial spending either of their capital, or profits on the bank. Is not this the effect of the expence of their management? Is not this expence paid in their notes? But did ever any body imagine that this expence did not diminish the profits of banking? Consequently, such expence may exhaust these profits, if carried far enough; and if carried still farther, will diminish the capital of the banking stock.

As a farther illustration of this principle, let me suppose, an honest man, intelligent, and capable to undertake a bank. I say that such a person, without one shilling of stock, may carry on a bank of domestic circulation, to as good purpose as if he had a million; and his paper will be every bit as good as that of the bank of England. Every note he issues will be secured on good private security; this security carries interest to him, in proportion to the money which has been advanced by him, and stands good for the notes he has issued. Suppose then that after having issued for a million sterling, all the notes should return upon him in one day. Is it not plain, that they will find, with the honest banker, the original securities, taken by him at the time he issued them; and is it not true, that he will have, belonging to himself, the interest received upon these securities, while his notes were in circulation, except so far as this interest has been spent in carrying on the business of his bank? Large bank stocks, therefore, serve only to establish their credit; to secure the confidence of the public, who cannot see into their administration; but who willingly believe, that men who have considerable property pledged in security of their good faith, will not probably deceive them.

This stock is the more necessary, from the obligation to pay in the metals. Coin may be wanting, upon some occasions, to men of the greatest landed property. Is this a reason to suspect their credit? Just so of banks. The bank of England may be possessed of twenty millions sterling of good effects, to wit, their capital; and the securities for all the notes they have issued; and yet that bank might be obliged to stop payment, upon a sudden demand of a few millions of coin.

Runs upon a bank well established, betray great want of confidence in the public; and this want of confidence proceeds from the ignorance the greatest part of men are in, with regard to the state of their affairs, and to the principles upon which their trade is carried on.

From what has been said, we may conclude, that the solidity of a bank which lends upon private security, does not so much depend upon the extent of their original capital, as upon the good regulations they observe in granting credit. In this the public is nearly interested; because the bank securities are really taken for the public, who are creditors upon them in virtue of the notes which circulate through their hands.