73 In the midst of this clamour and distress, a new bank was established in Scotland to relieve the distress of the country.
“The design was generous but the execution was imprudent”
- It did not understand the nature and causes of the distress it meant to relieve.
- This bank was more liberal in granting cash accounts and in discounting bills of exchange than any other bank.
- It did not distinguish between real and circulating bills
- It discounted all bills equally.
- Its avowed principle was to advance, upon any reasonable security, the whole capital to be employed in improvements with slow and distant returns, such as the improvements of land.
- It chief purpose was to promote such improvements.
- It issued great quantities of its bank notes.
- But most of those bank notes were in excess of what the national circulation needed.
- The notes returned to be exchanged for gold and silver as fast as they were issued.
- Its coffers were never well filled.
- The capital which had been subscribed to this bank at two different subscriptions, amounted to 160,000 pounds, only 80% paid up.
- This sum ought to have been paid in at several different instalments.
- Most of the proprietors opened a cash account with the bank when they paid their first instalment
- The directors, thinking themselves obliged to treat their own proprietors with the same liberality with which they treated all other men, allowed many of them to borrow upon this cash account what they paid in upon all their subsequent instalments.
- Such payments only put into one coffer what had the moment before been taken out of another.
- Evin if its coffers were filled so well, its excessive circulation must have emptied them faster than they could have been replenished
- The only way to keep it filled was by continually drawing upon London with more and more bills of exchange.
- It was driven to this ruinous expedient a few months after opening, because its cofferes were always ill-filled.
The estates of the bank’s proprietors were worth several millions.
- Through their subscription to the original contract of the bank, their estates were pledged for answering all its engagements.
- This great pledge enabled it to carry on business for more than two years despite its too liberal conduct.
- When it was obliged to stop, it had about 200,000 pounds bank notes in circulation.
- In order to support the circulation of those notes which were continually returning as fast they were issued, it had been constantly drawing bills of exchange upon London which continually grew in value and number.
In the end, the bills amounted to over 600,000 pounds.
- This bank in little more than two years, advanced upwards of 800,000 pounds at 5%.
- This 5% on the 200,000 pounds which it circulated in bank notes might be considered as clear gain, deducting only the expence of management.
- But it was paying 8% in interest and commission on the 600,000 thousand pounds worth of bills of exchange upon London.
- It was consequently losing more than 3% on more than 3/4 of all its dealings.
74 This bank seem to have produced the oppposite effects it intended.
- They intended to support the spirited undertakings in different parts of the country
- They intended to supplant all the other Scotch banks, particularly those in Edinburgh, by drawing the whole banking business to themselves.
- Those other Scotch banks offended this bank by being backward in discounting bills of exchange.
- This bank gave some temporary relief to those projectors
- It enabled them to continue their projects for about two years longer than they could otherwise have done.
- But it only enabled them to get so much deeper into debt
- When ruin came, it fell so much heavier upon the projectors and their creditors.
- This bank, in reality, aggravated in the long-run the distress imposed by those projectors on themselves and on their country.
- It would have been much better for themselves, their creditors, and their country, had most of them been obliged to stop two years sooner than they actually did.
- The temporary relief this bank gave to those projectors was a permanent relief for the other Scotch banks.
- All the bad bills of exchange which the Scotch banks were so backward in discounting, went to this new bank where they were received with open arms.
- Those other banks easily got out of that fatal circle which would have caused them loss and discredit.
75 In the long-run, the operations of this bank increased the real distress of the country it meant to relieve
- It relieved from a very great distress those rivals whom it meant to supplant.
76 Initially, people thought that no matter how fast its coffers might be emptied, that it might be easily replenish by raising money from the securities of its debtors.
- I believe, experience soon convinced them that raising money by security was too slow to refill their coffers
- They were forced to draw bills upon London which they paid with other drafts with accumulated interest and commission.
- Though the bills allowed them to raise money quickly, it led to a loss each time
- In the long-run they must have ruined themselves as a mercantile company, though not as fast as by the more expensive practice of drawing and redrawing.
- They made nothing by the interest of the paper
- Because it was in excess of what was needed by the national circulation
- The paper returned to them to be exchanged for gold and silver as fast as they issued it
- Their shortage of metal money continually obliged them to borrow metal money.
- They would have lost from the expence of:
- This method of borrowing
- Employing agents to look for and to negotiate with people who had money to lend
- Drawing the proper bond or assignment
- Replenishing their coffers in this manner may be compared to a man who employed a number of people to go continually with buckets to a well at some miles distance to replenish a water-pond that was always losing water by a stream that was continually running out of it.
77 But though this operation had proved not only practicable but profitable to the bank as a mercantile company, the country derived no benefit from it
- On the contrary, the country must have suffered a very considerable loss by it.
- This operation could not augment the quantity of money to be lent.
- This bank became a sort of general loan office for the whole country.
- Those who wanted to borrow applied to this bank instead of applying to private persons.
- But a bank which lends money to 500 people is not likely to be more judicious than a private person who lends to a few people whom he knows.
- Most of the debtors of such a bank would likely be chimerical projectors
- They would be the drawers and re-drawers of circulating bills of exchange
- They would employ money in extravagant undertakings which they would probably never complete
- Even if those undertakings were completed, would never repay their expence.
- Those undertakings would not afford a fund to maintain the labour employed to make them.
- The sober and frugal debtors of private persons, on the contrary, would be more likely to employ the money borrowed in sober undertakings
- Their undertakings would be proprtioned to their capitals
- Their undertakings would be less marvellous but would be more solid and profitable
- Their undertakings would afford a fund to maintain a greater quantity of labour than that employed to make them.
- The success of this bank would not increase the capital of the country
- It would only have transferred most of the national capital from prudent and profitable to imprudent and unprofitable undertakings.