Chap 2c. Central Banks

The Bank of England

79 The Bank of England is the biggest bank of circulation in Europe.

  • It was incorporated by a charter under the Great Seal on July 27, 1694.
  • It then advanced to government £1.2 million in exchange for an annuity of £100,000 composed of:
    • £96,000 annual interest at 8%
    • £4,000 annually for management expenses
  • The credit of the new government established by the Revolution must have been very low because it was obliged to borrow at so high an interest.


80  In 1697, the bank was allowed to enlarge its capital stock by an engraftment of £1,001,171

  • Its whole capital stock at this time therefore was £2,201,171. (£1.2m + 1m)
    • This engraftment was to support the public credit.
  • In 1696, tallies had been at 40, 50, and 60% discount.
    • Bank notes were at 20%
  • During the great silver recoinage at that time, the Bank discontinued the payment of its notes.
    • The Bank was necessarily discredited.


81 In pursuance of the 7th Anne, c. vii. (in 1708), the Bank paid into the exchequer £400,000.

  • Making in all the sum of £1.6 million. (£1.2m + £400k)
  • In 1708, therefore, the credit of government was as good as that of private persons, both at 6%.

6% was the common legal and market interest rate of those times.

  • In pursuance of the same act, the bank cancelled exchequer bills at £1,775,027 at 6% interest.
    • At the same time, it allowed to take in subscriptions for doubling its capital.
  • In 1708, the bank’s capital was £4,402,343. (£2.2m * 2)
    • It had advanced to government £3,375,027. (£1.6m +£1.77m)

82 By a call of 15% in 1709, £656,204 was paid in.

  • In 1710, another of 10% £501,448 was paid in.
  • In consequence of those two calls, therefore, the bank capital amounted to £5,559,995. (£4.4m + £656k + £501k)

83 In pursuance of the 3rd George I., c. 8 in 1716, the bank delivered £2m of exchequer bills to be cancelled.

  • It had, therefore, advanced to government £5,375,027. (£3.37m + £2m)
  • In pursuance of the 8th George 1, c. 21 in 1721, the bank bought £4m of South Sea Company stock.

In 1722, its capital stock was increased by £3.4m because of the purchase.

  • At this time, therefore:
    • the bank had advanced £9,375,027 to the public. (£5.37m + £4m)
    • the bank’s capital stock was only £8,959,995 (£5.5m + 3.4 m)
  • The sum advanced to the public, and for which it received interest, began first to exceed its capital stock.
    • The capital stock paid a dividend to the owners of the bank stock
  • In other words, the Bank began to have an undivided capital (money lent out), over and above its divided capital stock.
    • It has continued to have the same kind of undivided capital ever since.
  • In 1746, the Bank had advanced £11,686,800 to the public.
    • Its divided capital was raised to £10,780,000.
  • Those two sums has continued to be the same ever since.
  • In pursuance of the 4th of George III., c. 25 (in 1763), the Bank paid £110,000 without interest to government for the renewal of its charter.
    • This sum, therefore, did not increase those two other sums.

84 The Bank dividend has varied according to:

  • the variations in the interest rate it received
  • other circumstances

This interest rate has gradually been reduced from 8% to 3%.

  • For some years past, the bank dividend has been at 5.5%.

85 The stability of the Bank of England is equal to the stability of the British government.

  • All that it has advanced to the public must be lost before its creditors can sustain any loss.
  • No other banking company in England can:
    • be established by act of Parliament, or
    • consist of more than six members
  • It acts as an ordinary bank and as a great engine of state.
    • It receives and pays most of the annuities due to the creditors of the public.
    • It circulates exchequer bills
    • It advances to government the land and malt taxes which are not paid up until some years after.
  • In those different operations, its duty to the public may sometimes have obliged it, without any fault of its directors, to overstock the circulation with paper money.
    • It discounts merchants’ bills.
    • It has supported the credit of the principal houses of England, Hamburgh, and Holland.
    • In 1763, it advanced about £1,600,000 in one week, mostly in bullion.
      • Though I do not warrant this sum or the shortness of the time.
    • It also has been reduced to paying in sixpences.


The Role Of Banks In The National Wealth

86 “It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country.”

  • The money which a dealer keeps unemployed for answering occasional demands is dead stock.
    • It produces nothing to him or to his country.
    • The judicious operations of banking enable him to convert this dead stock into:
      • active and productive stock
      • materials to work on
      • tools to work with
      • provisions and subsistence to work for
      • stock which produces something to himself and his country.
  • The gold and silver money in any country which circulates and distributes its annual produce to the proper consumers is all dead stock, just like the dealer’s ready money.
    • It is a very valuable part of the country’s capital.
      • Yet it produces nothing to the country.
  • The judicious operations of banking substitutes much of gold and silver with paper.
    • It enables the country to convert much of this dead stock into active and productive stock which produces something.
  • The gold and silver money which circulates in any country may be compared to a highway.
    • It carries to market all the country’s grass and corn yet it produces no grass and corn by itself.
  • The judicious operations of banking provides a sort of wagon-way through the air.
    • It enables the country to convert much of its highways into good pastures and corn fields.
    • It increases the annual produce of its land and labour very considerably.
  • However, the country’s commerce and industry cannot be so secure when they are suspended on the Dædalian wings of paper money as when they travel on the solid ground of gold and silver.
    • Although commerce and industry may be augmented by paper money, the unskillfulness of the conductors of paper money exposes the country to several accidents which no prudence or skill of those conductors can guard against.




87 If a country’s whole circulation were done with paper instead of gold and silver, there would be so much more confusion if its enemy gains:

  • its capital, and
  • the treasure which supported the credit of the paper money.

Exchanges could only then be made by barter or credit.

  • The prince would not be able to pay his troops or furnish his magazines since all the taxes were paid in paper money.
  • The state of the country would be much more irretrievable than if most of its circulation consisted in gold and silver.
  • A prince should guard against that excessive multiplication of paper money which ruins the banks which issue it.
    • He should guard against that multiplication of paper money which enables banks to fill most of the country’s circulation.


Two Branches of the Circulation of Money

88 The circulation of every country is divided into two branches:

  1. The circulation of the dealers with one another
  2. The circulation between the dealers and the consumers

Paper or metal money may be employed in either circulation.

  • Each circulation requires a certain stock of money.
  • The value of the goods circulated between the dealers and dealers can never exceed the value of those circulated between dealers and consumers.
    • Whatever is bought by the dealers is ultimately destined to be sold to consumers.
    • The circulation between the dealers is carried on by wholesale.
      • It requires a large sum for every transaction.
    • The circulation between dealers and consumers, on the contrary, is carried on by retail.
      • It frequently requires very small sums.
        • A shilling or a halfpenny is often sufficient.
      • “But small sums circulate much faster than large ones.”
        • A shilling changes masters more frequently than a guinea.
        • A halfpenny changes masters more frequently than a shilling.
    • The annual purchases of all the consumers are at least equal in value to the purchases of all the dealers.
      • However, consumer purchases can be transacted with fewer money.
        • That money serves as the instrument of many more retail purchases than wholesale purchases because of its more rapid circulation.

89 Paper money may be regulated to confine itself to the circulation between dealers and dealers.

  • They may be regulated to extend between dealers and consumers.
  • Where the smallest circulating bank notes are £10, as in London, paper money confines itself very much to the circulation between the dealers.
  • When a consumer receives a £10 bank note worth 200 shillings, he changes it at the first shop where he will buy 5 shillings’ worth of goods.
    • The £10 note often returns into the dealer’s hands before the consumer has spent 1/40th of the money. [5 shillings/200 shillings]
  • In Scotland, bank notes are issued for so small sums as 20 shillings.
    • The paper money extends to a big part of the circulation between dealers and consumers.
    • 10 and 5 shilling notes filled most of that circulation before the Act of Parliament stopped their circulation.
  • In North American currencies, paper was issued for small sums as a shilling.
    • Paper shillings filled almost all of that circulation.
    • In some paper currencies of Yorkshire, it was issued even for a sixpence.

90 Where small bank notes are commonly issued, many mean people are enabled and encouraged to become bankers.

  • A promissory note for a sixpence will be better received by everybody without scruple than a £5 or 20 shilling note.
    • But the frequent bankruptcies of such beggarly bankers would be a very big inconvenience.
      • It would even be a very great calamity to many poor people who received those notes in payment.

91 Perhaps it were better that no bank notes were issued smaller than £5.

  • Paper money would probably then confine itself to the circulation between the different dealers, as in London.
  • In most parts of the UK, £5 will:
    • buy fewer goods
    • be seldom spent all at once
      • Unlike £10 which are spent all at once, amidst the profuse expence of London.

92 There is always plenty of gold and silver where paper money is confined to the circulation between dealers and dealers, as in London.

  • Where paper money extends itself to a big part of the circulation between dealers and consumers, as in Scotland and more in North America:
    • gold and silver are banished almost entirely
    • almost all the ordinary transactions of its interior commerce are done with paper
  • The suppression of 10 and 5 shilling bank notes somewhat relieved the scarcity of gold and silver in Scotland.
    • The suppression of 20 shilling notes would probably relieve it more.
  • Those metals became more abundant in America since the suppression of some of their paper currencies.
    • Gold and silver were more abundant before the institution of those currencies.

93 Banks might still be able to give the same assistance to country’s industry and commerce if paper money were confined to the circulation between dealers and dealers, as when paper money filled almost the whole circulation.

  • The dealer’s ready money for answering occasional demands is destined to circulate between himself and the other dealers he buys goods from.
    • He has no need to keep ready money to circulate between himself and the consumers because the consumers bring ready money to him.
  • Banks might still be able to relieve those dealers from needing to keep ready money unemployed for answering occasional demands by:
    • discounting real bills of exchange
    • lending on cash accounts even if the circulation would be confined between dealers and dealers
  • The banks can still give the utmost assistance to the traders.

94 Restraining private people from receiving a banker’s promissory notes which they are willing to receive, and restraining a banker from issuing such notes everyone is willing to accept, are violations of that natural liberty which the law should support and not infringe.

  • Such regulations may be considered a violation of natural liberty.
  • But those exertions of the natural liberty of a few individuals which might endanger the security of the whole society, should be restrained by the laws of all governments, of the most free as well as of the most despotical.
  • The obligation of building firewalls is a violation of natural liberty of the same kind with the banking regulations here proposed.

95 A paper money consisting in bank notes is equal in value to gold and silver money when it is:

  • issued by people of undoubted credit
  • payable on demand without any condition
  • always readily paid as soon as presented
  • equal in value to gold and silver, since gold and silver money can be had for it at any time
    • Whatever is bought or sold for such paper must be bought or sold as cheap as it could have been for gold and silver.

96 The increase of paper money increases the amount and reduces the value of the whole currency.

  • It increases the money price of commodities.
  • Paper money does not necessarily increase the amount of the whole currency.
    • Because the amount of gold and silver in the currency is always equal to the amount of paper added to it.
  • Provisions are cheapest in Scotland now, than in 1759 or from the start of the last century.
    • There was more paper money in the country then than at present because of the circulation of 10 and 5 shilling bank notes.
      • But the proportion between the price of provisions in Scotland and England is the same now as before the great multiplication of banks in Scotland.
  • Corn is fully as cheap in England as in France.
    • Though there is more paper money in England and scarce any in France.
  • In 1751 and 1752, when Mr. Hume published his Political Discourses and after the great multiplication of paper money in Scotland, the price of provisions rose probably due to the badness of the seasons and not to the multiplication of paper money.

97  It would be otherwise with a paper money consisting in promissory notes, of which the immediate payment:

  • depended on the goodwill of its issuers
  • depended on a condition which the holder of the notes might not always have it in his power to fulfill
  • was not exigible until after a certain number of years and bore no interest in the meantime

Paper money in promissory notes would fall below the value of gold and silver according to the:

  • difficulty or uncertainty of obtaining immediate payment
  • length of time at which payment was exigible.

98 Some years ago, the Scottish banks inserted an Optional Clause into their bank notes.

  • They promised payment to the bearer:
    • as soon as the note should be presented, or
    • six months after such presentment, with 6-month interest
  • Some bank directors took advantage of this optional clause.
    • They sometimes threatened those who demanded gold and silver for their notes, that the demanders should be content with just a part of what they demanded.
    • At that time, the bank’s promissory made up most of Scottish currency.
    • This uncertainty of payment degraded the currency below the value of gold and silver money.
    • During the continuance of this abuse chiefly from 1762-1764, the exchange between London and Carlisle Scotland was at par.
      • The exchange between London and Dumfries would sometimes be 4% against Dumfries.
        • Even though Dumfries was less than 30 miles away from Carlisle.
      • At Carlisle, bills were paid in gold and silver.
      • At Dumfries, bills were paid in Scotch bank notes.
    • The uncertainty of getting those bank notes exchanged for gold and silver coin degraded them 4% below the value of that coin.
    • The same Act of Parliament which suppressed 10 and 5 shilling bank notes also suppressed this optional clause.
      • It restored the exchange between England and Scotland to its natural rate, or to what the course of trade and remittances might make.

99 In the paper currencies of Yorkshire, the payment of so small a sum as a sixpence required that the holder of the note should bring the change of a guinea to the issuer.

  • This was very difficult for the holders of such notes.
    • It must have degraded this currency below the value of gold and silver money.
  • An Act of Parliament declared all such clauses unlawful.
    • It suppressed, as in Scotland, all promissory notes payable to the bearer under 20 shillings value.

100 The paper currencies of North America consisted in government paper and not in bank notes payable to the bearer.

  • The payment was not exigible until several years after it was issued.
  • The colony governments declared it a legal tender.
    • They paid no interest to the holders of this paper.
  • If the colony were perfectly secure, £100 payable in 15 years at 6% interest, is worth around £40 ready money today. (100 * 1/[1.06^15])
    • To oblige a creditor to accept £40 payment for a debt of £100 was such violent injustice perhaps never attempted by any other free government.
    • The honest and downright Doctor Douglas assures us that this was originally a scheme of fraudulent debtors to cheat their creditors.
  • In 1772, the government of Pennsylvania pretended on their first paper money to render their paper of equal value with gold and silver.
    • This was done by enacting penalties against those who sold goods with a colony paper price different from its gold and silver price.
    • This regulation was equally tyrannical but much less effective.
  • A positive law may render a shilling equal to a guinea because it may direct the courts to discharge the debtor who has made that tender.
    • But no positive law can oblige a free seller to accept of a shilling as a payment for something priced at a guinea.
  • In the exchange with Great Britain, £100 was occasionally considered equal to £130 in some colonies.
    • In other colonies, £100 was equal to £1,100 currency.
  • This difference in the value was due to:
    • the difference in the amount of paper printed in the colonies
    • the distance and probability of the term of its final discharge and redemption.

101 An Act of Parliament which declared that no paper currency emitted in the colonies should be a legal tender, is most equitable. 

  • However, such a law is so unjustly complained of in the colonies.

102 “Pennsylvania was always more moderate in its emissions of paper money than any other of our colonies.”

  • Its paper currency never sunk below the value of the gold and silver in the colony before the first emission of its paper money.
    • Before that emission, the colony raised its coin denomination.
    • It ordered 5 shillings sterling to pass in the colony for six and threepence, then six and eightpence, by act of assembly.
    • Therefore, £1 colony currency was more than 30% below the value of £1 sterling, even when the colony currency was in gold and silver.
    • When the £1 colony currency was turned into paper, it was seldom much more than 30% below that value.
    • The pretence for raising the coin denomination was to prevent gold and silver exportation.
      • It aimed to make equal quantities of those metals pass for greater value in the colony than in Great Britain.
      • However, they found that:
        • the price of all goods from Great Britain rose exactly in proportion as they raised their coin denomination.
        • their gold and silver were exported as fast as ever.

103 The paper of each colony was used to pay the provincial taxes.

  • This paper money derived some additional value over and above the length of time for its final redemption.
  • This additional value depended on the amount of paper issued which was in excess of what could be used to pay taxes.
    • In all the colonies, it was very much in excess.

104 A prince who orders that taxes paid to him be paid in a paper money, might give a certain value to this paper money, even if the terms of its final redemption should depend entirely on the prince.

  • If the bank which issued this paper kept its amount always below what was needed to pay taxes:
    • the demand for paper might cause it to even bear a premium, and
    • the paper could have more value in the market than the gold or silver currency it was issued for.
  • This is the idea for the Agio of the bank of Amsterdam.
    • The Agio is the superiority of bank money over current money.
    • They pretend that this bank money cannot be taken out of the bank at the owner’s will.
    • Most foreign bills of exchange must be paid in bank money.
      • It must be paid by a transfer in the books of the bank.
    • The bank of Amsterdam alleges that its directors are careful to keep the total bank money always below the demand.
    • Bank money sells for a premium, or bears an agio of 4-5% above the same nominal sum of the country’s gold and silver currency.
    • However, this account of the bank of Amsterdam is in a great measure chimerical.

105 A paper currency which falls below the value of gold and silver coin does not thereby sink the value of those metals.

  • It does not cause equal quantities of them to exchange for a smaller quantity of goods.
  • The proportion between the value of gold and silver and that of goods depends on the fertility of the mines which supply the commercial world.
  • It does not depend on the amount of any paper money in any country.
  • It depends on the proportion between the amount of labour needed:
    • to bring gold and silver to market
    • to bring a certain quantity of goods.

106 Banks are considered perfectly free if:

  • Their trade is done with safety to the public
  • Bankers are:
    • restrained from issuing any bank notes for less than a certain sum
    • obliged to pay immediate and unconditionally for bank notes when they are presented

The recent multiplication of banking companies in the United Kingdom has alarmed many people.

  • It actually increases the security of the public.
  • It obliges all banks to be more circumspect in their own conduct.
  • It prevents them from extending their currency beyond its due proportion to their cash.
  • It guards themselves against those malicious runs caused by their competitors.
  • It restrains the circulation of each bank within a narrower circle.
  • It reduces their circulating notes to a smaller number.
  • “By dividing the whole circulation into a greater number of parts, the failure of any one company, an accident which, in the course of things, must sometimes happen, becomes of less consequence to the public.”
  • “This free competition, too, obliges all bankers to be more liberal in their dealings with their customers, lest their rivals should carry them away.”
  • “In general, if any branch of trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so.”

Words: 3,727

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