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ments and receipts is augmented in any one particular place, the business of paying and receiving is more easily and cheaply transacted, the necessary guineas becoming fewer' in proportion to the sums to be received and paid, and the bank-notes wanted, though increasing on the whole, becoming fewer in proportion also." *
This enumeration of payments made and received in London in bank-notes shews, that they derive from the sources I have stated, and result either from London being a staple-town, from its having manufactures, or from its consumption ; and that all these demands of London upon the inland country or foreign countries to be extinguished and compensated require only to be exchanged one against the other : this exchange is effected by bank-notes in the most simple, most rapid, and least expensive way. The bank notes with svhich the bills due by English merchants to foreigners for their importations are discounted, are immediately employed by foreigners to pay what they owe to England on account of the goods exported, and the bank-notes are returned to the bank by those who have to pay these bills. So that this circulation of bank-notes against inland and foreign bills is nothing, in fact, but a mere and simple interchange of respective demands.
The same operation takes place with regard to the demands of London upon the provinces and of the provinces upon London, The notes which the bank-directors
Tienry Thornton's Inquiry into the Vuure of Paper Credit,
give for those different bills make them owners of the bills, and the acceptors of them repay the bank its notes when the bills become due. So that, in this second operation, as in the first, bank-notes are merely an instrument for exchanging and liquidating commercial demands.
Viewed in this light, and confined exclusively to this function, bank-notes want no funds for their guarantee; they carry with them the most efficacious guarantee that can be desired. The bills of exchange for which they are given, must always bring them back to the bank; and if on some rare occasion, the holder of the bank-notes sliould wish to convert them into coin before the bills become due, the payment of the bills soon restores the value of the notes to the bank; whence it follows, that banks, limited to the liquidation of commercial debts and demands, require little or no capital stock.
There are, however, three cases in which banknotes, though sufficiently guaranteed by the bills for which they have been exchanged, may fall into actual discredit, be thrown out of circulation, and endanger the existence of banks and the true interests of the nation.
The first is, when the debts due by the homemerchants to foreigners are more considerable than the debts due by foreigners to the national commerce. It is obvious that, in this case, after the reciprocal debts and demands have been compensated, the surplus must be paid in specie by the bank, which had given its notes for the bills drawn for this surplus. When the discounted bills become due, the bank, it is true,
is repaid its advances to foreigners: yet the necessity of making these advances, obliges it to keep in its coffers a stock of metallic currency proportioned to their amount. Should the country be greatly indebted to foreigners, it may even happen that whatever may be the magnitude of the stock of coin reserved for this purpose, it may yet prove insufficient; in that case, the bank is forced to suspend its payments, and can no longer fulfill its destination.
If it be observed, that such a misfortune is not owing to the institution of banks, but to the disproportion of national industry to the need of or predilection for the produce of foreign industry, and to the ignorance or impotence of government in correcting this disorder and proportioning the expences of the state to its revenue; I say, the observation is but specious. It is certain, that banks facilitate by their notes the circulation of both foreign and national produce, by accelerating its consumption and liquidating its value. If merehants had not the facility of getting their bills of exchange discounted in bank-notes, if they were always obliged to keep in their coffers the coin necessary to take up the bills they accept, they would be more reserved in their speculations, and the circulation of foreign coinmodities would be less active and more expensive; their price would rise and the consumption diminish, and consequently the state would be a sufferer by such a commerce.
It is therefore the interest of commercial banks, and the duty of governments, to pay the greatest attention to the vibrations of the balance of trade, which is the critee rion of their success and prosperity, or of their decline and ruin.
The second case takes place when political events occasion uneasiness about futurity, and cause extraordinary exigencies or embarrassments in public affairs to be apprehended: in that case, the holders of banknotes hasten to exchange them for coin ; those who are indebted to the bank, pay badly or with difficulty ; and if the crisis lasts, ihe bank is obliged to pay all its notes in specie, and risks to recover only part of its demands: it is therefore forced to violate its engagements, to suspend its paya ents, and to wait for the return of confidence and credit.
Finally, banks of circulation have to fear lest the merchants, wliose bills they discount, should abuse their facility for the purpose of extending their speculations beyond duc bounds, and pile in their warehouses a larger stock of commodities than what ordinary consumption requires. The longer or shorter continuance of such a glut may force the merchants to exchange the bank-notes for coin in a proportion superior to what the banks receive. If a bank, in such a case, has not in its coffers a sufficient stock of metallic currency to meet such an exigency, its embarrassment aggravates the crisis, and it is again forced to suspend its payments, and to wait till the equilibrium between consumption and the stock on liand be re-established.
Against these dangers, which are but too often realized, and to which all banks of circulation have been more or less exposed, there is no effective remedy,
Palliatives afford but little or no relief. The only resource of a bank in cuch a case is to restrict the issue ofits notes. But this ineasure increases the general distress, gives the alarm to commerce, and frequently accelerates the evil which it wishes to prevent.
Mr. Henry Thornton remarks, that in that case the bank would even do better to give a greater latitude to its discounts, than to restrict the issue of its notes: but the advice does not appear very safe, and ought of course not be considered as convincing. Unfortunately, the discredit of banks of circulation, when it happens through any of the causes just stated, is as fatal as their credit was beneficial to commerce. It paralyses circulation, obstructs labour, carries disorder and desolation in every branch of industry and trade, and shakes social prosperity in its very foundation.
Notwithstanding these imminent and fatal risks, banks of circulation have been introduced into almost all countries of Europe, and their present advantages have got the better of distant fears. .
England has, as it were exclusively, entrusted them with the circulation of all the values of her labour, her industry, her trade, her private income, and public revenue. There are banks in large and small towns, in boroughs, and even in villages. In 1800, their number amounted to three-hundred and eighty-six *; and all were in some degree ramifica
* Henry Thornton's Inquiry into the Nature and Effects of the Paper-Credit of England, page 151.-But, in 1810, there were not less than eight hundred and eighteen private or country-banks in Great Britain, Seo an account of the number of licences for the