Chap. 2j: Division of Stock

94 Restraining private people from receiving the promissory notes of a banker 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
  • It is payable upon demand without any condition
  • It is always readily paid as soon as presented
  • It is 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 augments the quantity and diminishes the value of the whole currency

  • It augments the money price of commodities.
  • Paper money does not necessarily increase the quantity of the whole currency
  • Because the quantity of gold and silver in the currency is always equal to the quantity of paper added to it.
  • Provisions are cheapest in Scotland now than in 1759 or from the beginning of the last century
  • Though there was then more paper money in the country than at present due to the circulation of 10 and 5 shilling bank notes.
  • The proportion between the price of provisions in Scotland and England is the same now as before the great multiplication of banking companies 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 in 1752, when Mr. Hume published his Political Discourses and after the great multiplication of paper money in Scotland, the price of provisions very sensibly rose due probably 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 good will of those who issued them
  • Depended on a condition which the holder of the notes might not always have it in his power to fulfill
  • Was not exigible till after a certain number of years, and which in the meantime bore no interest.
  • Paper money in promissory notes would fall below the value of gold and silver according:
  • To the difficulty or uncertainty of obtaining immediate payment
  • To the distance 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 had the condition that the holder of the note should bring the change of a guinea to the person who issued it;

  • This condition 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 till several years after it was issued;
  • The colony governments declared it a legal tender and paid no interest to the holders of this paper
  • If the colony was perfectly secure, 100 pounds payable in 15 years at 6% interest, is worth around 40 pounds ready money today. (100 * 1/[1.06^15])
  • To oblige a creditor to accept 40 pounds payment for a debt of 100 pounds was an act of 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 upon 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 effectual.
  • 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 course of exchange with Great Britain, 100 pounds sterling was occasionally considered as equivalent to 130 pounds in some colonies
  • In other colonies 100 pounds sterling was equal to 1,100 pounds currency
  • This difference in the value was due:
  • To the difference in the quantity of paper printed in the colonies
  • The distance and probability of the term of its final discharge and redemption.


101 “No law, therefore, could be more equitable than the Act of Parliament, so unjustly complained of in the colonies, which declared that no paper currency to be emitted there in time coming should be a legal tender of payment.”


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 the denomination of its coin
  • It ordered 5 shillings sterling to pass in the colony for six and threepence, then six and eightpence, by act of assembly
  • A pound colony currency, therefore, was more than 30% below the value of a pound sterling, even when the currency was in gold and silver.
  • When the pound 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 the exportation of gold and silver.
  • It aimed to make equal quantities of those metals pass for greater sums in the colony than in the mother country.
  • They found, however, that the price of all goods from the mother country rose exactly in proportion as they raised their coin denomination
  • They found that their gold and silver were exported as fast as ever.


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

  • From this use, it derived some additional value over and above its real or supposed distance of the term of its final discharge and redemption.
  • This additional value depended on the quantity of paper issued which could be employed in the payment of the taxes.
  • The amount of paper It was in all the colonies very much above what could be employed in this manner.


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 discharge and redemption should depend entirely on the prince.
  • If the bank which issued this paper kept its quantity always below what could be employed in this manner:
  • The demand for paper might cause it to even bear a premium
  • The paper could have more value in the market than the quantity of 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
  • This bank money, they pretend, cannot be taken out of the bank at the will of the owner.
  • 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 directors of the bank, they allege, are careful to keep the whole quantity of 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 gold and silver currency of the country.
  • This account of the bank of Amsterdam, however, it will appear hereafter 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 quantity of any paper money in any country.
  • It depends on the proportion between the quantity of labour needed to bring gold and silver to market and the quantity of labour neeeded 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
  • Bankers are obliged to pay immediate and unconditionally for bank notes when they are presented

The late 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 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.”

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