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Charles Ganilh.

An inquiry into the various systems of political economy: their advantages and disadvantages: and the theory most favourable to the increase of national wealth online

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joint-stock company. Subsequent statutes allowed
the bank to lend money on pledges, and to deal in
o-old and silver bullion.

These grants shew, that the founders of the bank
and the parliament of England had not very correct
notions of the nature and object of banks of circula-
tion ; and this becomes evident, when we consider
that the bank, even when it was in the greatest dis-
tress, advanced to government all the money it could
procure, either by creating new shares, or through
private loans. In its commencement the bank was,
and could not be considered otherwise than, a chest
for government to borrow from, or a lombard
(iumber-ofrice) totally unconnected with commercial
credit.

But if the bank mistook at first the career which
it had to run with so much glory, it was not long ere
it discovered its error, and wisely promoted the object
which it was to accomplish. Without ceasing to be
faithful to its engagements with the public creditor,
from which* it could not separate itself on account of
the sums advanced to government, the bank leaned



340 ON THE VARIOUS SYSTEMS

more towards commercial credit, and perceived that all
its efforts ought to be directed to circulate commer-
cial bills without the intervention of metallic money.

It was a difficult problem for the bank to solve,
since it could only offer its own credit guaranteed by
the capitals which it had in the public funds ; a gua-
rantee already discredited in public opinion by the
discreditof the funds, and perfectly novel and unknown
in money concerns. The banks that had preceded
the Bank of England, had all effected their payments
in real coin, equal and even superior to the standard
of the common metallic currency. How should the
bank be able to deviate from the customary method
which had become a generally adopted rule ? This
consideration did not stop the bank-directors. They
dared to open a new path ; they created bank-notes
convertible into specie at the pleasure of the holder,
and used them in all their payments. The promise to
pay in coin at the pleasure of the holder was obviously
and notoriously illusory ; and both the bank and the
public knew perfectly well that it could not be real-
ized : for there was not, and there could not be, any
other coin in the coffers of the bank but what was
received as interest of the public debt, and its amount
bore no proportion to its notes.

Bank-notes were however received in circulation,
and though at a discount for a considerable length of
time, they yet recovered their value in proportion as
the services which they rendered to circulation became
better known, as their nature was better appreciated,
and the circumstance clearly understood that the ba-
sis of their credit rested less on the primitive capital



OF POLITICAL ECONOMT. 541

of the bank than on the equivalent commercial bills
of which they effected the payment. Thus the Bank
of England notes owed their success to the same prin-
ciples which cause the commercial credit of all coun-
tries to prosper and flourish ; that is, to an entire
confidence in the good faith and probity of the indi-
viduals engaged in commerce.

The successful attempt of the Bank of England
led to the discovery of one of the properties of banks,
which had not yet been and which could not have
been suspected as long as banks had made use in their
operations of real coin of a standard superior to the
common metallic currency. Tilt that time it had
been, and must have been, supposed that the services
and successes of banks were due to their monied ca-
pitals. On a more close inspection, however, it would
have been perceived that those capitals bore no pro-
portion to the operations of banks, and that the abili-
ty, good faith, and fidelity of the directors and agents
of such banks, are their true support in both cases ;
it would have been seen that bank-money is but an
instrumentto liquidate commercial debts, and that of
course it matters little whether it be of gold and sil-
ver or of paper.

It has already been observed, that the transfers of
the money deposited in the bank of Amsterdam li-
quidated, without displacing ally money, the totali-
ty of the commercial transactions of that city, and
that by means of these tranfers as many payments
were effected in one hour as could be performed in,
metallic currency in one day. I ought to add, that
the rapidity of this mode of payment required a

44



342 ON THE VARIOUS SYSTEMS

smaller quantity of money than any other method
would have required ; and it is probable that,
with the deposit of a single million, as many pay-
ments were effected as with twenty millions in me-
tallic currency. This singular phenomenon could
undoubtedly not be attributed to money only; it
was owing to other causes; and that such was the
fact could no longer be doubted, when it was per-
ceived that the notes of the Bank of England pro-
duced the same effects as the tranfers of the Bank of
Amsterdam.

These causes deserve careful investigation.

At the foundation of the bank of England, London
was but a manufacturing town, and a place of great
consumption. Though a sea-port town, and enjoy-
ing a very extensive maritime commerce, it had not
yet risen to the rank of a staple- town, that is, it had
no share in the exchanges of general commerce.

As a manufacturing town, London was a creditor
for the whole amount of the produce of its industry
disposed of in the home or foreign trade.

As a place of great consumption, London was a
debtor for the amount of all the commodities bought
in the home-market, or imported from foreign coun-
tries.

The produce sold gave to the London merchants
bills of exchange on the towns of the interior or up-
on foreign countries, and the commodities imported
or purchased at home gave to those places bills upon
London,

Had these bills, which made London alternately a
debtor and a creditor, been drawn and become due at
the same time, the method of Lyons would have com-



OF POLITICAL ECONOMY. S4S

pensated the debts and demands by simply exchang-
ing the respective bills, and no coin would have been
required but for common payments, and settling the
differences.

But these bills of exchange were like those which
Amsterdam and Hamburgh had to pay and compen-
sate; they were payable at different dates ; in order
to be extinguished, they must necessarily be paid ;
and it mattered little of what nature the instrument
of payment was, since he who received it in payment
of a bill of exchange of which he was the holder, paid
it again to the bearer of the bill of exchange of which
he was the acceptor. The instrument lost its power
only when the merchants of London held no more
bills of exchange from the interior or from foreign
countries, and there were yet bills of exchange drawn
upon them unpaid. In that case the bank-notes
could not discharge the debt, because they were not
the actual money which can extinguish by payment a
demand that cannot be extinguished by compensation.

Experience having once established this property
of bank-paper, the Bank of England conformed its
further operations to it, and employed it with equal
success in liquidating and extinguishing commercial
demands by the debts of commerce, public expences
by the public revenue, and a great part of private
expences by a great portion of private income. In
short, with the help of its notes, the Bank of Eng-
land liquidated all the commercial transactions of
the London merchants at home and abroad ; all the
engagements of government with its functionaries,
agents, and contractors ; and all the transactions of



544 02C THE VARIOUS SYSTEMS

opulent private individuals with their tradesmen, ser-
vants, and labourers.

Mr. Henry Thornton gives the same account of the
operations of the Bank of England.

" Bills of exchange," says this author, who is
extremely well acquainted with the paper circulation
of England, " are drawn upon London from every
quarter of the kingdom, and remittances are sent to
the metropolis to provide for them, while London
draws no bills or next to none upon the country.
London is in this respect to the whole island in some
degree what the centre of a city is to the suburbs.
The traders may dwell in the suburbs, and lodge
many goods there, and they carry on at home a vari-
ety of smaller payments, while their chief cash account
is with the banker, who fixes his residence among the
other bankers in the heart of the city. London is
also become, especially of late, the trading metropo-
lis of Europe, and indeed of the whole world ; the
foreign drafts on account of merchants living in the
out-ports and other trading towns, and carrying on
business there, being made with scarcely any excep-
tions, payable in London. The metropolis, moreover,
through the extent of its own commerce and the
greatness of its wealth and population, has immense
receipts and payments on its own account, and the
circumstance of its being the seat of government and
the place where the public dividends are paid, serves
to increase its pecuniary transactions. The practice
indeed of transferring the payments of the country to
London being once begun, was likely to extend itself;
for in proportion as the amount and number of pay-



ipf POLITICAL ECONOMY. 345

ments and recepts 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 re-
ceived and paid, and the bank-notes wanted, though
increasing on the whole, becoming fewer in propor-
tion 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 Lon-
don being a staple-town, from its having manufac-
tures, or from its consumption; and that all these de-
mands of London upon the inland country or foreign
countries to be extinguished and compensated require
only to be exchanged one against the other; this ex-
change is effected by bank-notes in the most simple,
most rapid, and least expensive way. The bank notes
with which the bills due by English merchants to fo-
reigners for their importations are discounted, are im-
mediately 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 no-
thing 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 tfce bank-



* Henry Thornton's Inquiry into tliz nature of Paper Credit,
page 59.



346 ©N THE VARIOUS SYSTEMS.

directors 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 liqui-
dating commercial demands.

Viewed in this light, and confined exclusively to
this function, bank-notes want no funds for their gua-
rantee; 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 banknotes should 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 bank-
notes, though sufficiently guaranteed by the bills for
which they have been exchanged, may fall into actu-
al discredit, be thrown out of circulation, and endan-
ger the existence of banks and the true interests of
the nation.

The first is, when the debts due by the home mer-
chants 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.



OF POLITICAL ECONOMY. 347

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 fulfil its destination.

If it be observed, that such a misfortune is not
owing to the institution of banks, but to the dispro-
portion of national industry to the need of or predi-
lection 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 pro-
duce, by accelerating its consumption and liquidating
its value. If merchants 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 ths
circulation of foreign commodities would be less ac-
tive 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 there-
fore 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 crite-



ON THE VARIOUS SYSTEMS

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 extraor-
dinary exigencies, or embarrassments in public affairs
to be apprehended : in that case, the holders of bank-
notes hasten to exchange them for coin : those who
are indebted to the bank, pay badly or with difficulty ;
and if the crisis lasts, the bank is obliged to pay alt
its notes in specie, and risks to recover only part of
its demands : it is therefore forced to violate its en-
gagements, to suspend its payments, and to wait for
the return of confidence and credit.

Finally, banks of circulation have to fear lest the
merchants, whose bills they discount, should abuse
their faeility for the purpose of extending their specu-
lations beyond due bounds, and pile in their ware-
houses a larger stock of commodities than what ordi-
nary 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 em-
barrassment aggravates the crisis, and it is again for-
ced to suspend its payments, and to wait till the equi-
librium between consumption and the stock -on hand
be re established.

Against these dangers, which are but too often
realized, and to which all banks of circulation have
been more or lessexposed, there is no effective remedy.



OF POLITIGAL ECONOMY. 349

Palliatives afford but little or no relief. The only
resource of a bank in such a case is to restrict the is-
sue of its notes. But this measure 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 vezy safe, and ought of
course not be considered as convincing. Unfortu-
nately, 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 154. — But, in 1810, there were not
less than eight hundred and eighteen private or country-banks in
■Great-Britain. See an acount of the number of licences for the

46



$3® ON THE VARIOUS SYSTEMS

tions of the Bank of England, and served the lattejr
as channels of communication with every part of the
empire.

But a conjecture hazarded by Mr. Henry Thornton
respecting the extent of the payments effected every
day by the London banks, from sixty to seventy in
number, deserves particular attention. He calculates
them at the enormous sum of from four to five mil-
lions sterling a day ; which, reckoning only four mil-
lions for three-hundred and ten days, gives one
thousand two hundred and forty millions a year.
And what appears not less wonderful is, that this
immense circulation is effected with twelve or thir-
teen millions sterling i^'coin, or bank-notes, which
supply its place.*

What an astonishingly rapid circulation ! What
an economy in the cost of circulation ; and what an
immense benefit to the nation which created, and
knew how to avail itself of this advantage !

Several distinguished writers, among whom David
Hume holds the first rank, are of opinion, that such
a considerable issue of paper-currency has the same



issue of promissory notes payable on demand, delivered to the House
of Lords by the Stamp Office, July 4th, 1811.— T.

* The number of London bankers, on the first of February, 1S12,
was exactly seventy; the circulation of Bank of England notes
amounted, in 1810, to twenty-three millions sterling; and the total
circulation of Great-Britain, including the private bankers' notes, to
fifty-six millions, to which may be added about four millions in spe-
cie. See the very able speech of 'Mr. G. Johnstone, delivered in the
House of Commons on the 19th of July, 1811,



OF POLITICAL ECONOMIC 351

effect as the introduction of a large quantity of gold
and siver ; that it must necessarily depreciate, raise
the price of labour and merchandize, and be detri-
mental to the sale of national produce abroad and at
home.

Hume observes, that the high price of commodi-
ties occasioned by the abundance of gold and silver
is a disadvantage for an established commerce, and
restricts it every- where by enabling poor nations to
sell cheaper than the rich ones,*

Mr. Henry Thornton observes, with as much saga-
city as justness, that the issue of a paper- currency,
like the introduction of a large quantity of gold and
silver, does not raise the price of labour and commo-
dities in one country only, but the effect, when it takes
place, is general, and extends to all countries. Indeed*
a paper currency drives gold and silver out of circu-
lation, and causes the metallic currency to be export-
ed. This exportation augments the quantity of the
precious metals wheresoever they are carried, sinks
their value, and of course raises the price of labour
and commodities. Consequently, it is not only in the
country in which a paper currency is issued, that the
price of labour and its produce rises ; the rise is gen-
eral, and of course detrimental to none or hurtful to
all countries, t



* Hume's Essays, Edinb. 1804; of the Balance of Trade, pag»
330.

f But if a comparatively small island exports twenty-five millions
of its coin, and increases its paper-currency to fifty-six millions, how
can the effect of twenty-five millions upon a whole continent, be equal
to that of thirty -millions additional currency upon a country tha£



3*52 ON THE VARIOUS SYSTEMS.

These are the considerations which have hitherto
been advanced on the system of banks of circulation.
I have connected the subject with that of the Bank
of England, because that establishment lias been the
model of such kinds of banks, and still serves them as
a pattern and -an 'example.

The theory of banks has never been well understood
in France ; a country so enlightened, which has made
so great a progress in sciences, in arts, in every kind
of knowledge, and which has almost always accele-
rated their improvement when it had not given them
the impulse. At least, the knowledge of the banking
system lias never been sufficiently diffused in France,
to dissipate the gleomy fears of ignorance, to protect
the country against the deceitful illusions of impro-
vidence, or to help her to overcome the obstacles con-
nected with every new institution, and particularly
with the establishment of banks, which comes inclose
contact with so many interests, and excites so many
apprehensions and so much unasiness in the minds
of all

But the surprise ceases when we reflect on the na-
ture and spirit of the ancient government of France.
Instead of encouraging and favouring the study of
political economy, it considered itself interested
in proscribing it, or in leaving its tenets unprac-
tised, and, if I may be allowed the expression,
lived from day to day, and either rejected all



counts no more than twelve or thirteen millions of inhabitants ? Jt is
the most convincing argument that a great local depreciation in suc&
a case is unavoidable. — T.



OF POLITICAL ECONOMY. 353

innovations, or adopted them merely to abuse them,
and to render them as fatal as they might have been
useful, if they had been well directed.

In 1716, a bank of circulation was established at
Paris on the plan and principles of the Bank of Eng-
land. France was indebted for it to Mr, Law, a
foreigner, a Scotchman, whose name is but too fa-
mous in the annals of finance. This bank had every
success that could be expected as long as it was con-
ducted according to the guardian and beneficial rules N
of banks of circulation.

But its nature was soon altered, and measures pe-
culiar to commercial credit were applied to public
and private credit. I have elsewhere explained this
mistake audits dangerous results.*

This mistake occasioned the ruin of the bank, and,
what must appear very extraordinary, is that its ben-
eficial effects, as long as it was confined to the opera-
tions of a bank of circulation, were completely for-
gotten. The bank was pronounced good for nothing^
no doubt, because it was not found calculated for .
every use to which it had been attempted to be put.

Sixty years after, a merchant, whose knowledge of
political economy I have heard greatly extolled, and
whose talents for that reason were little employed,!
succeeded by great exertions in establishing a dis-
counting bank (caisse d'escompte) for the circulation
of the commercial bills of Paris. The success of
this bank exceeded his most sanguine expectations :



* Essai Politique sur le Revenu Public,
f Mr. Panchaud.



554 ©N THE VARIOUS SYSTEMS '

indeed it could not fail to be considerable at a time
when the commerce of France with foreign nations
afforded every year a balance of thirty or forty mil-
lions of French livres ; when Paris, the seat of a flour-
ishing industry, the residence of a brilliant and mag-
nificent court, of a numerous and opulent nobility,
of a rich and sumptuous clergy, of an immence con-
course of strangers eager in the pursuit of pleasure?
and of several companies of financiers profusely lav-
ishing their fortune ; when Paris, I say, obtained ?
through its own private trade, as considerable a ba-
lance as that of the whole French trade with foreign



Online LibraryCharles GanilhAn inquiry into the various systems of political economy: their advantages and disadvantages: and the theory most favourable to the increase of national wealth → online text (page 23 of 33)