Chap. XIV: Of optional Clauses contained in Bank Notes

As we are examining the principles upon which banks of circulation upon mortgage, which issue notes payable in coin, are established in Scotland, it is proper to take notice of every circumstance which may arise from the extensive combination of the interests of trade and circulation, especially when we find such circumstances influencing the political welfare of society.

An optional clause in a bank note is added to prevent a sudden run upon banks, at a time when more coin may be demanded of them than they are in a capacity to pay.

Banks not regulated by statute, are private conventions, in which the parties may include what conditions they think fit. Banks, therefore, may insert in their notes, the conditions they judge most for their own advantage. Thus, they may either promise peremptory payment in coin upon demand, or they may put in an alternative, that in case they do not choose to pay in coin, they may pay in bills, or in transfer of their stock, or in other circulating paper not their own; or they may stipulate payment at a certain time after the demand, with interest during the delay. All these alternatives are inserted, in order to avoid the inconvenience of running short of coin, and of being obliged to stop payment altogether.

We have said above, that the profits of banks consist in their enjoying the same interest for the notes they lend, as if the loan had been made in gold or silver. This is a very great object, no doubt; but the policy of nations has established it, and therefore we shall suppose it to be an incontroverted principle.

In which ever way, therefore, an optional clause is inserted, it should be such as to cut off all profit from the bank, upon all paper presented for payment, from the time of presentation; and every artifice used to suspend the liquidation of the paper, to the advantage of the bank, and prejudice of the bearer, should be considered as unfair dealing in the bank, and prohibited by law.

When the optional clause has no tendency to procure an advantage to the bank, in prejudice of the holder of the paper (except as far as the holder is thereby deprived of the use of the coin, which on certain occasions cannot be supplied by the paper), it becomes the duty of a statesman to examine how far it is expedient to suffer such stipulations to be inserted in a money, which is calculated to carry on the mercantile interest of the nation.

Banks, we have said, are the servants of the public, and they are well paid for their services. Although the notes issued by them are not commonly made a legal tender in payment; yet the consequence of a well established bank, is to render them so essential to circulation, that what is not a legal obligation becomes one, in fact, from the force of custom.

Let us therefore examine the advantages which result to banks from this optional clause, and the loss which results to a nation from their using it, and then compare the advantages with the inconveniences, in order to determine whether it be expedient to permit such obstructions in the circulation of paper.

The advantage which banks reap is confined to that of gaining time, at the expence of paying interest. The interest paid by them is an aukward operation. They receive interest for the note; because they have in their possession the original security given for the notes when they were first issued; and they begin to refund this interest to the holder of the note from the time they avail themselves of the optional clare. Could banks, therefore, borrow coin in a moment, at the same interest which they pay to the holder of the note, they would certainly never make use of this optional clause. But this coin can not be found in a moment; and the banks, to save themselves the trouble, and the expence of augmenting their fund of coin, or of procuring a fund in another country, upon which they might draw for the payment of that national balance, which, by becoming banks, they tacitly engage to pay for the nation; render the credit of individuals precarious with strangers, and raise a general distrust in the whole society which they ought to serve. Here then is a very great loss resulting to a nation from the establishment of banks. Were no bank established, no merchant would contract a debt to strangers, without foreseeing the ready means of discharging it with the coin circulating in the country. In proportion as this coin came to diminish, so would foreign contracts of debt diminish also. Thus credit, at least, might be kept up, although trade might be circumscribed, and manufactures be discouraged. Now when, in order to advance trade and encourage manufactures, a statesman lends his hand towards the melting down of solid property, and countenances banks so far as to leave this operation to them, with the emolument of receiving interest for all their paper; and when, in order to facilitate the circulation of this paper, the very inhabitants concur in throwing all their specie into a bank, is it reasonable to indulge banks so far as to allow them to add an optional clause, which disappoints the whole scheme, which stops trade, ruins manufactures, raises the interest of money, and renders the operation of melting down property quite ineffectual for the purposes which it was intended to answer. Farther:

The loss a bank may be at, in providing coin, is susceptible of estimation, let it be brought from ever so distant a country; because we know that the quantity to be provided never can exceed the value of the grand balance. But who can estimate the loss a nation sustains, when an interruption is put to the carrying on of trade and manufactures? When the industrious classes of inhabitants are forced to be idle for a short time, the consequences are hardly to be repaired: they starve, they desert; the spirit of industry is extinguished: in short, all goes to ruin.

Besides, when banks do not lay down a well digested plan for paying regularly, and without complaining, this grand balance due to strangers, they are forced to have recourse to expedients for preserving their credit, more burdensome, perhaps, than what is required of them; and not near so effectual for removing the inconveniences complained of.... This being the case, the shortest and the best method for preventing such abuses, is to oblige banks to pay upon demand, in coin or bills, at the option of the holders of the note. This will force them into the method for providing them; to wit, fairly to borrow money from nations to whom we owe, and to pay a regular interest for it, without an obligation to refund the capital, until the grand balance shall take a favourable turn; in which case, the banks will regorge with coin drawn from strangers; and these strangers will then find as great an interest in being repaid, as the bank found in borrowing from them, while the balance was in their favour.