Henry Dunning Macleod.

The theory and practice of banking (Volume 1) online

. (page 1 of 47)
Online LibraryHenry Dunning MacleodThe theory and practice of banking (Volume 1) → online text (page 1 of 47)
Font size
QR-code for this ebook


THE

THEORY AND PEACTICE

OF

BANKING.



TIIK



THEORY AND PEACTICE



BANKING.



HENRY DUNNING MACLEOD, Esq., M.A.

OF TRINITY COLLEGE, CAMfiRIDGE, AND THE INNER TEMPLE; BARRISTER-AT-LAW ;

FELLOW OF THE CAMBRIDGE PHILOSOPHICAL SOCIETY, AND OF THE

STATISTICAL SOCIETY OF LONDON,



Testimony is like the shot of a long bow, which owes its efficacy to the
force of the shooter ; argument is lUve the shot of a cross bow, equally
forcible whether discharged by a giant or a dwarf. — Botle.



SECOND EDITION
VOLUME I.

LONDON;

LONGMANS, GREEN, READER, & DYER.

1866.

THE AUTHOR RESERVES THE RIGHT OF TRANSIwlTION.



LONDON :
JOHN KlN(i &, CO.Ml'ANV, LIJUTED, I'KINTERS, QUE1:;N STREET, CITY.






PREFACE

TO THE

SECOND EDITION.



f



The earlier part of this Work has been entirely re-
modelled. When the first edition was written, the
Author found the fundamental principles of the current
books on Political Economy so unsatisfactory, that he
was oblio;ed to examine them at considerable leno;th.
Since then he has published the Elements of Political
Economy^ and especially the Dictionary of Political
\' Economy^ in which the foundations of the Science are
1) thoroughly examined ; and, therefore, it is less neces-
\ sary to do so in a Work specially devoted to Banking.

In this edition, those fundamental conceptions and
general laws only are investigated, which are exclu-
si\'ely necessary for the Theory of Credit.

Since the first edition was published, the doctrines
established in it have constantly obtained increasing
influence.

After pointing out the arithmetical errors, and the
unphilosophical conceptions upon which the Bank Act
of 18-14 is founded, and also that the theory it seeks
to enforce was expressly condemned by all the great
Banking authorities of former times, the Author de-
monstrated that the only true way of controlling the



iSSObS



VI. PREFACE.

Paper Currency, or Credit, is by sedulously adjust-
iug the Rate of Discount by the Bullion in the Bank,
and the state of the Foreign Exchanges.

This doctrme, but very imperfectly understood, and
extremely unpopular at that time, is now universally
acknowledged to be the true one, and is adopted by
all the great Banks in Europe. The Usury Laws in
France have been modified in order to enable the
Bank of France to adopt it.

An Imperial Commission was subsequently appointed
to examine into the whole subject of the Usury Laws,
with a view to their abolition, before which the Author
was examined as a witness.

In the former edition an attempt was made to in-
vestigate the Theory of Accommodation Paper, and to
point out exactly wherein its true danger consists.
In 1861, the failure of Laurence^ Mortimer^ and
Schrade)\ popularly known as the great leather fraud
case, took place. In his very long and elaborate
judgment in this most important commercial case,
Mr. Commissioner Holroyd quoted the explanation
given in this work at great length, thereby giving
the sanction of his high authority to its correctness.

In 1862, M. Michel Chevalier presented an elabo-
rate report on the Author's Works to the ^Vcademy of
Moral and Political Sciences of the Imperial Institute
of France, in which he declared his unreserved adhe-
sion to their principles. Tliis report was published
at lengtli in the Joiu^nal des Econoniiste.'i for August,
1.S62.



PREFACE. VII.

In 1863, M. Henri Richelot, a gentleman holding
a high position in the Ministere du Commerce, pub-
lished a volume entitled " Une Revolution en Economie
Politique : expose des Doctrines de M. Madeod^'' giving
a full exposition of the doctrines maintained in tKe
Author's Works. M. Rouher, then Minister of
Commerce and Agriculture, ordered this Work to be
officially distributed to all the Chambers of Commerce
in the Empire.

The subject of Credit and Banking has assumed
such increased importance in recent years, that the
Emperor has appointed an Imperial Commission to
investigate it thoroughly. The Commission has drawn
up an exhaustive series of questions, and requested
the Author to send in an answer to them.

There can be but little doubt that a similar course
must before long be adopted in this country. Symp-
toms are not wanting to warn us of the approach of
one of those periodical monetary cataclysms which
have always been attended with such terrible conse-
quences. When that event occurs, if not before, a
searching inquiry must be instituted into the whole
subject, and then the Author hopes that it will be
made manifest that the principles maintained in this
Work, which are in strict accordance with, and a
development of, those of the most celebrated authori-
ties of former times, are proved to be true equally
by Reason and Experience.

Campden Hill,

Maxj Mil, 1866.



CONTENTS



THE FIRST VOLUME.



PAGE

Introduction xxv

CHAPTER I.

DEFINITIONS AND ILLUSTRATIONS OP THE TERMS
USED IN MONETARY SCIENCE.

§ 1. On the DEFrNiTiON op Wealth 3

Adam Smith's Definition of Wealth 3

Defects of this Definition 4

Inconsistencj' of Smith's Doctrines 5

2. Aristotle's Definition of Wealth 6

This the True Definition 7

3. On the Three Species op Wealth 7

Wealth is of Three Distinct Species 7

Quotation from ^Escliines Socraticus respecting Immaterial
Wealth 8

Incorporeal Property 9

4. These Three Species of Wealth constantly exchanged . . 9
This gives rise to Srx Species of Exchanges . . . .10

5. On some Confusion in the expression National Wealth 10

6. On the Meaning of the Word Property. . . .11
Property is not a Tiling, but a Right residing in the person . 11

7. Two great divisions of Property 13

Property in a specific chattel already in existence . . .12

Property independent of any specific chattel, and to something
which is not yet in existence 12

Varieties of this latter, or Incor^ioreal, Property . . .12

Credit is one species of this Incorporeal I^roperty . . .13

Each kind of Property the subject of Sale, or Exchange . 13



CONTENTS.

PAGE

8. On the Depestition op Value 13

Tlie Value of any Economic Quantity is any otlier Economic
Quantity for which it can be exchanged . . . .14

Value necessarily requires the concurrence of tir^o minds . 14

9. On Money, Currency, Credit, Circulating Medium,

Circulation 14

On the want which gare rise to the use of Money . . .15

Money required to measure, record, and transfer the debt
that would aiise from an unequal Exchange . . .15

Whence called Currency 16

10. Aristotle gave the true definition of Money . . . .16
Other writers have given the same definition . . . .17
Different substances used as Money by different Nations . 17

Metal the best substance 18

Definition of Credit. — Credit is anything icliich is of no

direct use, but which is taken in exchange for something else,
in the bdief or confidence that it can be exchanged away
again 18

Money is the highest and most general form of Credit . . 19

Say calls a sale, half an exchange 19

Credit, or Debt, is the name of a certain species of Property . 20
There are shops and markets for the sale of Debts . . .20
Credit is the Present Right to a Future Payment . . .21
The Unit of Debt, or Credit 21

11. Of Currency or Circulating Medium . . . .21

Absm'dity of the name Currency 22

Circulating Medium more correct 22

Ideas involved in term Currency 23

Enumeration of different kinds of Currency . . . .23

12. The idea of Currency is distinct from that of Money . . 24

13. The quantity of money in any countiy bears no necessary

relation whatever to the quantity of other goods, or to
their price 24

14. On Circulation 25

Distin(;tion between Barter, Exchange, and Circulation 25

15. On Price, Discount, and Interest 27

Definition of Price 27

The Value of Money varies inversely as Price . . .27

Discoi:nt is the diiference between the price of a debt and

its amount 27

The Value of IVIoncy varies directly as Discount . . .28

Definition of Ln'iji;i{kbt 28

Diseoiuil more [irolilalilc llian Interest 28



CONTENTS. XI.

PAGE

10. On Securities for Money and Convertible Securities 28

Different kinds of Securities for Money 28

Different kinds of Convertible Securities . . . .29

17. On TnE Definition of Capital 29

Cajiital is any Economic Quantity used for the purpose of
profit 29

Capital may increase in two distinct ways . . . .30

18. Capital may be used productively in three different ways —

agriculture, manufactiux-s, and commerce . . .30

Exchange, or purchase, is one species of Production . . 31
Credit is used productively in the same way as Money . . 31

19. On Fixed and Floating Capital 32

Definition of Fixed Capital 32

Definition of Floating Capital 32

On the conversion of Floating into Fixed Capital . . .34

20. On Production and Consumption 35

Erroneous doctrines regarding Consumption . . . .36
Consumjition in Economics means purchase . . . .37
Confusion between Consommatioa and Consomption in French 37
Erroneous doctrines regarding Production . . . .38
Production in Economics means bringing forwai'd for sale . 38
Production in Economics is equivalent to Supply . . .39
But Consumption is not equivalent to Demand . . .39
Reciprocid Production and Consumption constitute Exchange 39

21. On Rate of Interest and Rate of Profit . . .39
Erroneous Definition of Rdie of Profit by Economists . . 40
Rectification of this error clears up difficulties . . .41

CHAPTER II.
THE THEORY OF VALUE.

1. The complete Theory of Value comprises : the Definition,

the Cause, and the General Law of Value . . .4}

2. On the Definition of Value 4o

An}^ Economic Quantity may have Value in terms of the
others 40

Confusion of ideas on Value 47

3. Error of the Expression Intrinsic Value . . .48
Money has not Intrinsic but General Value . . . .49
Bank Notes have value because they are exchangeable . 49

4. On the distinction between Depreciation .vnd Dimi-

nution in Value 50

5. On tiie Origin, Source, or Cause of Value . . 52

6. Popular doctrine that L.vbour is the cause of Value . . 52
This shewn to be erroneous 53



I. CONTESTS.

PAGE

§ 7. Say's doctrine that Utility is the cause of Value . . . 56
This sheAvn to be erroneous 56

8. Demakd is the sole cause of Value 57

Value originates solely in the Human Mind . . . .58

/;: is not Labour which is the cause of Value, but Value which
is the cause of, or inducement to, Labour . . .58

9. On the General Law op Value 59

Fundamental defects of the Economical System of Ricardo

and Mill 59

The true General Law of Value given by Lord Lauderdale . 60

10. A Standard of Value is impossible . . . .60

Great confusion of Adam Smith on Value . . . .61

Smith and Ricardo's errors about a Standard of Value . . 62

jVIr. Samuel Bailej^ points out the impossibility of there being
a Standard of Value 64

CHAPTER III.
THE THEORY OF CREDIT.
§ 1. Preliminary Observations 69

Section I.

2. In^vestigation of tiie Nature op Credit . . .72
]\Iathematicians call Debts Negative Quantities . . .73

Meaning of this 73

A Release from a Debt is equivalent to a Payment in Money 75

A Mutual Release of Debts is equivalent to a reciprocal Pay-
ment of Debts 75

3. On the Distinction between a Bailjient .\nd a Debt 76
Fundamental distinction between Instruments of Credit and

Bills of Lading, Dock Warrants, &c 78

4. Ambiguous meaning op the word Lo.\n . . . .80
Causes of the confusion on the subject of Credit . . .81

Section II.

§ 5. Upon Instruments of Credit 82

Instruments of Credit of two sorts 82

6. Certain legal j)cculiarities regarding different kinds of Pro-

perty 82

7. On Bills ok Exchange 84

8. Definition of a Chkquic 85

9. Origin of Bills of E.Kcliange 85

10. On Puomihhouv Notes 87

11. 'I'wo great divisions of the System of Credit . . . .88



CONTENTS. Xm.

Section III.

PAOB

g 12. On Commercial Credit 89

On the System ok Credit Based upon Simultaneous
Transfers op Commodities 89

Description of Commercial operations, giving rise to BiUs of
Exchange 90

Traders who buy Commercial Debts 91

Exemplification of the distinction between Bills of Exchange
and Bills of Lading 94

Meaning of Bankers " contracting their issues " . . .96

Explanation of a ' ' Pi'essure on the Money Market " . .97

13. On Credit created for the purpose op being

applied to the FoRMiVTION OF NEW PRODUCTS . 99

Examples 100

Credit performs tlie same functions as Money . . . 102

Meaning of an Accommodation Bill 103

Erroneous notions regarding Real and Accommodation Bills 104
Commercial transactions on Credit are Sales .... 105
Mercantile Credit is Mercantile Capital 106

Section IV.

§ 14. The Theory of Banking 108

Period when Bills of Exchange became saleable . . . 108

15. Erroneous Notions prevalent as to the Nature of

BjVnking 109

Bankers are not Agents between those who want to Lend

and those who want to Borrow 109

Definition of a Banker 110

16. On the Meaning op the Word B^vnk .... 110
True meaning of the Italian word Banco . . . .111

Equivalent to Monte, a common Fund Ill

Similar meaning of B^vnk, when introduced into England . 112

17. On the Currency Principle 113

Definition of the Currency Principle . . . .113
First Banks of Deposit 114

18. On the Mech.\nism of B.anking 116

Origin of Bankers in England 116

Their method of doing bu.siness 116

Examination of Mr. Thornton's opinion . . .118

Legal Description of Banking 119

Change in their method of doing business by Bankers : instead

of issuing Notes they create Deposits .... 120

Origin of Cheques 121

Deposits and Cheques substitutes for B.\nk Notes . 122

Common misconception of the meaning of Deposit . . 122



XrV. CONTENTS.

PAGE

§ 18. Erroneous notions derived from Banking Accounts . . 123
Methods of operating by means of Deposits .... 124

Explanation of ordinary phenomena 125

Bankin2: consists in the creation and exchange of instruments

of Credit 126

Discounting bills is not borrowing money . . . .137

Banking Credit is Banking Capital 128

Erroneous notions of M'CuUoch, on Banks . . . .129
Great error of Mr. Mill, on Banking . . , . . 130

Error of those who suppose that the Bank Act of 1844.
prevents Banks from creating Credit .... 131

Report of Mr. Hamilton, on Banking 131

Advantages of Cheques over Bank Notes .... 132

When too much Credit is offefed for sale. Bankers must raise
the Rate of Discount 133

19. On Cash Credits 134

Origin of Cash Credits 134

Examples of their Utility 135

Cash Credits are Acconmiodation Paper . . . .138

20. On Open Credits 139

21. On the Transformation op Temporary Credit into

Permanent Capital 139

The Bank of England augmented its Capital, by receiving
its OAvn depreciated Notes as Specie .... 140

The Bank of Scotland did the same 140

This objected to, and the answer of the Bank . . .140

AH Joint Stock Banks increase their Capital by their own
Credit 141

22. On Accom.modation Bills 142

On tlie nature of Accommodation Paper .... 148

Exaggerated idea of tlie security of Real Bills . . . 144

Explanation of the true difference between Real and Accom-
modation Paper, and true danger of the latter . . 144

This cx] Sanation ((uotcd by Mr. Commissioner Holroyd, in
his judgment in Lmirence, Mortimcfr and Schrader . 145

Exposition of that case . . 147

Impossibility of dealing legislatively witli Accommodation
Pai)cr 149

Examination of some legal Doctrines 151

23. Ox TiiK Extinction of Ckkdit 152

DilTcrcnt methods by which Credit is extinguished . . 153

24. On the Limits of Ckkdit 154

Proportion of Credit to Money in Commercial Transactions 157

The true mode of curbing excessive Credit is by raising the

Rale of Discount 158



CONTENTS XV.

Section V.

PAGE

25. Examination of the Opinions op Modern Economists

ON Credit and Currency 159

Rise of difltrences of opinion on Credit 159

26. Economic Science originated from tlie disasters, &c., of the

Mississippi Scheme of John Law 159

Law's writings on Paper Credit and Paper Money. . . 161

27. Erroneous conception of Turgot on Credit .... 163

28. Ad^vm Smith's opinion on Credit and Currency . .163

Smith included aU Credit under the title of Currency and
Capital . . 164

29. Self-contradictions op J. B. Say on Credit . 167

Say enumerates Debts as Wealth 168

Say's self-contradictions on Value 169

Say's self-contradictions on Capital 170

Say expressly denominates Paper-Credit Capital . . . 172

30. Self-contradictions op Mr. Mill on Credit . . 176
Mr. Mill's definition of Wealth and Capital includes Credit . 177

. Mr. Mill expressly calls Bank Notes Capital . . . .179
Contradictory conceptions of Mr. Mill of the nature of Credit 180
Bastiat calls instruments of Credit Productive Capital . . 182

M'Culloch says that Credit is Capital 182

Gilbart says that Credit is Capital 183

32. On the common difficulty in understanding the subject of

Credit 183

Common doctrine that NotJdng can come out of Nothing . 184
Doctrine of some Economists that all Wealth is formed out
of the materials of the Globe 184

Knowledge is admitted to be Wealth 185

Is knowledge composed of indestructible primordial atoms? 186

Knowledge originates in the Mind ... . . 187

Hence the HtrNL\JS' Mind is a source of Wealth . . . 187

A thu-d species of Exchangeable Property, viz. : Incorporeal
Property, such as Col\^T^ghts, Patents, Shares in Com-
merciarCompanies, Public Debts, CrecUt, &c. . . . 188

This Property does not come from the earth, or from the
mind, but from Consent 188

33. The Opinions of various Writers on the Nature

and extent of the Currency 189

Till the beginning of this century all writers included all
forms of Ci'edit under Currency 190

Mr. Boyd fii-st confined CuiTcncy to Monej' and Bank Notes 192

This opinion appeared more strongly before Committee of
House of Commons in 1840 192

Mr. J. B. Smith considered Ciu-rency to include Deposits, but
not Bills of Exchange 192



CONTENTS.



§ 33. Mr. Cobaeu's opinion on Currency .

Mr. G. AY. Norman's opinion on Currency

Lord Overstone's opinion on CiUTCUcy .

;Mr. Tooke's opinion on Cim-ency .

Examination of these opinions

Reply to Lord Overstone's doctrines

True bearing of the case of MiUei- v. Ra^e

M. Michel Chevalier's opinion

Cuirency is the representative of transferable debt



194
195
196
200
203
205
206
208
209



CHAPTER IV.
THE THEORY OF THE COINAGE.

§ 1. Definition of Bullion 21

Definition of a Coin 213

The Name of a Coin does not affect its Value. . . . 214

Any quantity of metal in the form of Bullion is of the same
' value as same quantity in Coin 215

2. On the Mint Pkice and ]\LvrivET Price of Gold and

SiLA'ER 215

The Mint Pi-ice of Bullion is the number of coins it is cut into 215

To alter the Mint Price of Bullion is to alter the Standard
Weight of the Coinage 215

The Market Price of Bullion 216

WJien the Market Price of BnUion rises above the Mint Price^
the €.rcess is the proof and the measure of the depreciation of
the Coitiafje.

A rise of the ]\rarket Price of BuUion above the Mint Price
causes an export of BuUion 217

Oood and bad Coin cannot circulate together. Tlie bad Coin
dnves out the good Coin 219

EiToneous notions regarding Mint Price .... 219

Means of testing whether a difTerence in the usual value of
Gold and Silver Coin is due to a Diminntion in Value or
a Depreciation of cither Coinage 220

To alter the Mint Price of Gold would be unjust to all existing
contracts 221

Cases in wliich great diflTerences in Value between Coin and
Bullion took place 222

3. What is a Pound ? 222

E.xplanafion of liow the Sovereign ciime to be called a Pound 223

4. On a 1)(»iiji,k Standard 224

Definition of ]\Ioney or Legal Tender .... 224
In8Ui)erablc objections to a Double Standard .... 225
Fii-st coinage of Guineas to represent 20/ . .225

Great depreciation of tlif C(jinage in 1090 .22(5



CONTENTS. JCVIL

PAOB

Guineas rise to 30/ : great fall in the Exchanges . . . 226

Mr. Fleetwood's Sermon in 1G94 226

Parliamentary proceedings to remedy the disorder . . 227

Statements shewing the state of the Coinage in 1695 . . 228

Report of Mr. Lowndes on the State of the Coin . . . 229

He proposes to alter the current rate of the Coins . . . 230

Reply of Locke 232

Locke demonstrates the futility of Lowndes's plan. . . 235

The Government restored the Coinage according to its ancient

weight, tineness, and denomination .... 239

Derangement of the Coinage in 1708 239

Report of Sir Isaac Newton on the Coinage .... 239

Different values of Gold and Silver in different Countries . 240

Which causes a ch-ain of Silver from all Europe to the East . 240

And a flow of Gold to England and Spain .... 241

Newton shews that Guineas were only worth 20/8 . . 242

Guineas proclaimed to be cmTcnt at 21/ .... 243

Gold thus became the understood Commercial standaixl of
payment dming the Eighteenth Century . . . 243

This custom adopted as Law in 1816 244

Regtilations of the English Coinage 244



CHAPTER V.
THE THEORY OF THE EXCHANGES.

1. Definition of the " Exchanges " 247

2. Difference between Money Changing and Banking . . 248

Definition of Par op Exchange 249

Depreciation of the Coinage causes a fall in the Foreign

Exchanges 249

This disturbance of the Exchange expressed in two different
ways 250

3. No true Par of Exchange between Countries which use

different standards ' . 250

On the Nominal Exchange and Real Exchange . . 251

Rule to ascertain the true state of the Exchange when the
cmTcncy is depreciated 251

4. On the Nature op an Exchange 252

Example of an Exchange 253

Par time of Exchange 253

5. On Foreign Excilvnge 254

On Fixed and Variable Price 254

Table of Exchanges 255

6. On the Limits op the Variations of the Exchanges 2.56



XVIIT. CONTENTS.

PAGE

§ 7. Effects op an Inconvektible Paper Currency on the

Foreign Exchanges 357

A rise of t7ie pajKr jmce of gold obove the Mint Price, and a
continuous state of the Foreign Exchanges below the limit of
the real Exchange, is the proof and the measure of the
depreciation of the Paper Currency 259

8. On Exchange Operations 260

Causes wliicli produce temporary fluctuations of the Ex-
change beyond the specie points 261

Arbitration of Exchanges 363

London the Banking centre of the world .... 263
Arbitrated prices of Bullion 263

9. On the Eeal or Commercial Exchange. . . . 263
Two branches of trade in BulUon 263

1. With Bullion producing countries 264

2. With countries which do not produce Bulhon . . . 264
Movements of Bullion iniluenced by seven causes. . . 264

Ideas of the mercantile system 265

Doctrine of the Balance of Trade 266

Fallacy of this doctrine 267

Examples of trading 268

Causes of inflow or outflow of Bullion 272

Overtrading is a cause of a drain of Bullion .... 273
Example of the fallacy of Balance of Trade .... 375
Only two causes determine the Rate of Exchange . . . 377

10. On the Rate op Discount as affecting the Exchanges. 377

The Rate of Discount the most important cause that afi'ects
the flow of Bullion 377

11. On Foreign Loans, Securities, and Remittances as

affecting the exchanges 378

Mr. Boyd's negotiation of a Foreign Loan .... 378

Anotlier example 279

Importation of Foreign Secmlties 280

13. On Monetary and Political Convulsions as affecting

THE Exchanges 280

13. On THE Means op correcting an Adverse Exchange. 281

A rise in the Rate of Discount the most powerful method of
correcting an adverse Exchange 281

CHAPTER VI.
ON THE RISE AND PROGRESS OF BANKING.

§ 1. Nec(!SHary to give an account of the History of Banking . 385

2. Banking was invented by tlie Romans 385

3. Greek Bankers invented Discount 287

4. Bank Notes invented by tlic Chinese 288



COKTENTS.



5. Rise of Bankiiiif in Italy

Erroneous nulions of the dates of the Banks of Venice and
St. George

Banking first revived by the Florentines

6. The Bank op Venice

7. The Bank of St. George at Genoa

8. The Bank op Stockholm

9. The Bank op Ajisteruaji

10. History of B.vnking in Scotland

Bank of Scotland founded in 1695

Its Constitution

It issues £1 Notes

Stops Payment in 1704 and 1715

Receives Payment for increase of Capital in its own Kotes .
Outcry against this, and answer of the Bank . . . .

Foundation of the Royal Bank in 1727

Opinion against monopoly in Banking

The Royal Bank invents Cash Credits

Great over-banking in Scotland, optional clauses .
Fall in the Scotch Exchanges, and export of specie

Act of 1765, to prohibit Notes under 20/; and the optional

clause



Online LibraryHenry Dunning MacleodThe theory and practice of banking (Volume 1) → online text (page 1 of 47)