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An Enquiry into the Nature and Effects of the Paper Credit of Great Britain
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- GenresEconomics
Hardcover
First published January 1, 1802
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April 8, 2024
Henry Thornton’s 1802 treatise on money, banking, and credit was an intervention into debates called “the Bullionist Controversy” over England’s Restriction Act which had suspended gold convertibility of Bank of England notes in 1797. Thornton comes down as a staunch anti-bullionist in this book arguing that an inconvertible system of paper money can meet the liquidity needs of the economy so long as it is prudently managed by a strong central monetary authority. (Thornton would later contribute to the a report by the Bullion Committee calling for the return of gold payments because he lost faith in the Bank’s ability to oversee an inconvertible system with a floating exchange rate)
Thornton’s arguments are nuanced, sophisticated, and always qualified which likely explains his loss in the bullion debates to the much simpler, black-and-white, equilibrium thinking of the arch-bullionist Ricardo. In his systematic treatment of the monetary system—and the credit/financial/money nexus which constitutes it—Thornton begins with an investigation into the basic instruments of exchange and payments. For him, commercial credit is the basis for paper credit. That is, the manufactured goods on their way to consumption; ships, machinery, and other “dead stock”; and most importantly, the debts incurred by traders taking hold of goods which have not yet been paid for all constitute the commercial basis for the system of paper notes that facilitate trade in advanced market economies.
The basic instruments which stand in for cash payments when such commercial transactions occur are bills of exchange and promissory notes. His discussion of these discountable articles leads Thornton to attack Adam Smith’s real bills doctrine which, in short, claims that bills backed by the exchange of goods and services don’t lead to fluctuations in the price level whereas so-called “fictitious bills” would lead to instability because they have only nominal value separate from any real economic activity. Thornton, on the other hand, argues that this is essentially a distinction without a difference. Even in the case of real bills, their circulation among multiple traders creates more bills than there is “proper” for them to “represent.” The upshot of this discussion is the important conclusion that the actual difference between fictitious and real bills is the differential confidence in their eventual paying out and, consequently, the “different degrees of rapidity of circulation.”
The pages in which Thornton analyzes the many forms of circulating discountable articles testifies to a sophisticated appreciation for the highly variegated nature of monetary instruments. For him these assets are not merely money-substitutes usefully yet imperfectly standing in for the hard currency they stand in for. Rather, they are forms of money in their own right which facilitate payments, settle balances, and mediate exchange. That the monetary system is not reducible to commodity money in the form of gold tokens is what grounds his overarching theoretical commitment to an inconvertible system—so long as that system is prudently regulated. The necessity of managing such a system of inconvertible paper does not set it apart from a purely commodity-money system. Both require an active hand to supervise the chain of payments, though, in different ways.
Following his discussion of “degrees of rapidity of circulation” for different assets, Thornton embarks on a quite advanced analysis of the interplay between money velocity, supply, the propensity to hoard, and macroeconomic stability. The point of entry for him is consideration of the “degrees of rapidity” for the same medium at different times. Though he doesn’t use this terminology, in essence Thornton here explains that during a boom the velocity of money increases but when faced with a negative demand shock the “disposition to heard…prevail[s] in no inconsiderable degree.” Furthermore, the effect this has is to augment the money supply as the same number of notes (or whatever circulating medium) turns over at different rates quite independently of the action of the central bank who may have kept the issuance of notes constant but see a change in the effective money supply nonetheless. Thornton therefore asserts an early endogenous theory of the money supply in which the velocity of money acts as a main variable.
Additionally, the psychological dimension of this analysis with its emphasis on the subjective state of “confidence” and “trust” leads to a pretty modern view of bank runs and “contagion”. In highly interconnected financial systems investors are unable to differentiate between secure and vulnerable assets resulting in a general run to withdraw money so that basically localized issues (eg. In the subprime mortgage market) propagate into system-wide failures (eg. Collapse of the shadow banking system) because no one knows whose books exactly are exposed meaning, in practice, they all are. Thornton sees the same dynamic playing out in the English countryside where the secure notes of greater banks are lumped together with the inferior paper of smaller ones so that in a “season of alarm” they “fall into almost equal discredit” so that “if any one bank fails, a general run upon the neighboring one is apt to take place.”
In the lengthy fourth chapter of Paper Credit Thornton analyzes the crisis of 1797 that led to the Restriction Act, the institutional set-up of the Bank of England, and provides his prescriptions for effective management of the monetary system in what could be described as an early case of macroprudential policy proposals. As with the preceding investigations, Thornton’s launching off point is to challenge Adam Smith’s doctrines. For Smith it was wise policy for the central bank to only circulate as much paper as can be back by its gold reserves in all cases. However, Thornton warns against such narrow prescriptions arguing instead that resorting to cutting money supply whenever there is a heightened demand for gold would cause costly economic adjustments in the real sector. Thornton of course recognizes the importance of maintaining a sufficient gold reserve to conduct central bank operations: they must be sufficient to provision the occasional exchange, to defend the currency in international markets, and to meet any sudden extraordinary demand. However, a rigid one-to-one correspondence between gold and exchequer notes would unnecessarily commit the bank to, what is today called, countercyclical policy. That is, the necessity of reducing circulating money during a downturn.
The call for an interventionist central bank is clear. It is necessary for the monetary authority to engage counter-cyclically to demand shocks by maintaining the effective money supply (which likely requires an increase in the stock of notes issued because of the counteracting effect lack of confidence has on money velocity). In his evaluation of the Bank of England’s conduct during the crisis period, Thornton excuses the bank of culpability in precipitating the crisis; however, he faults it for not being expansionary enough—for “too much restricting its notes in the late seasons of alarm, than on that of too much enlarging them.”
Thornton is at pains in many places of his book to make clear his support for policy openness which can swiftly react to the exigencies of economic fluctuations. In the 20th century this would be labelled a “discretionary” as opposed to “rules-based” policy strategy. In chapter 7 he makes this point clear when discussing the decision to renew the Restriction Act. The ability of the authority to respond to the “particular circumstances of the times” (to exercise discretion) and not be bound to “any principle” (rigid set of rules) is paramount for the responsible management of the payments system.
Finally, Thornton expresses a clear understanding of “nominal wage stickiness” when he says “the rate of wages, we know is not so variable as the price of goods” which has implications for the duration of economic crises since the temporary distress in credit markets causes a fall in prices, squeezing profits between lower revenues and fixed labor costs, and ultimately “occasioning much discouragement of the fabrication of manufactures.” This story where a short-run demand shock translates into longer-run output gaps because money-wages don’t adjust anticipates later “hysteresis” theories. (That being said, I think some commentators overstate the affinities between Thornton and, in particular, Keynes on this point. For Keynes, nominal wage stickiness helps support the employment level by putting a floor under worker purchasing power and bolstering effective demand whereas Thornton sees it as a disequilbrium factor preventing full adjustment and is, therefore, squarely “classical” in the Keynesian sense here).
Thornton’s arguments are nuanced, sophisticated, and always qualified which likely explains his loss in the bullion debates to the much simpler, black-and-white, equilibrium thinking of the arch-bullionist Ricardo. In his systematic treatment of the monetary system—and the credit/financial/money nexus which constitutes it—Thornton begins with an investigation into the basic instruments of exchange and payments. For him, commercial credit is the basis for paper credit. That is, the manufactured goods on their way to consumption; ships, machinery, and other “dead stock”; and most importantly, the debts incurred by traders taking hold of goods which have not yet been paid for all constitute the commercial basis for the system of paper notes that facilitate trade in advanced market economies.
The basic instruments which stand in for cash payments when such commercial transactions occur are bills of exchange and promissory notes. His discussion of these discountable articles leads Thornton to attack Adam Smith’s real bills doctrine which, in short, claims that bills backed by the exchange of goods and services don’t lead to fluctuations in the price level whereas so-called “fictitious bills” would lead to instability because they have only nominal value separate from any real economic activity. Thornton, on the other hand, argues that this is essentially a distinction without a difference. Even in the case of real bills, their circulation among multiple traders creates more bills than there is “proper” for them to “represent.” The upshot of this discussion is the important conclusion that the actual difference between fictitious and real bills is the differential confidence in their eventual paying out and, consequently, the “different degrees of rapidity of circulation.”
The pages in which Thornton analyzes the many forms of circulating discountable articles testifies to a sophisticated appreciation for the highly variegated nature of monetary instruments. For him these assets are not merely money-substitutes usefully yet imperfectly standing in for the hard currency they stand in for. Rather, they are forms of money in their own right which facilitate payments, settle balances, and mediate exchange. That the monetary system is not reducible to commodity money in the form of gold tokens is what grounds his overarching theoretical commitment to an inconvertible system—so long as that system is prudently regulated. The necessity of managing such a system of inconvertible paper does not set it apart from a purely commodity-money system. Both require an active hand to supervise the chain of payments, though, in different ways.
Following his discussion of “degrees of rapidity of circulation” for different assets, Thornton embarks on a quite advanced analysis of the interplay between money velocity, supply, the propensity to hoard, and macroeconomic stability. The point of entry for him is consideration of the “degrees of rapidity” for the same medium at different times. Though he doesn’t use this terminology, in essence Thornton here explains that during a boom the velocity of money increases but when faced with a negative demand shock the “disposition to heard…prevail[s] in no inconsiderable degree.” Furthermore, the effect this has is to augment the money supply as the same number of notes (or whatever circulating medium) turns over at different rates quite independently of the action of the central bank who may have kept the issuance of notes constant but see a change in the effective money supply nonetheless. Thornton therefore asserts an early endogenous theory of the money supply in which the velocity of money acts as a main variable.
Additionally, the psychological dimension of this analysis with its emphasis on the subjective state of “confidence” and “trust” leads to a pretty modern view of bank runs and “contagion”. In highly interconnected financial systems investors are unable to differentiate between secure and vulnerable assets resulting in a general run to withdraw money so that basically localized issues (eg. In the subprime mortgage market) propagate into system-wide failures (eg. Collapse of the shadow banking system) because no one knows whose books exactly are exposed meaning, in practice, they all are. Thornton sees the same dynamic playing out in the English countryside where the secure notes of greater banks are lumped together with the inferior paper of smaller ones so that in a “season of alarm” they “fall into almost equal discredit” so that “if any one bank fails, a general run upon the neighboring one is apt to take place.”
In the lengthy fourth chapter of Paper Credit Thornton analyzes the crisis of 1797 that led to the Restriction Act, the institutional set-up of the Bank of England, and provides his prescriptions for effective management of the monetary system in what could be described as an early case of macroprudential policy proposals. As with the preceding investigations, Thornton’s launching off point is to challenge Adam Smith’s doctrines. For Smith it was wise policy for the central bank to only circulate as much paper as can be back by its gold reserves in all cases. However, Thornton warns against such narrow prescriptions arguing instead that resorting to cutting money supply whenever there is a heightened demand for gold would cause costly economic adjustments in the real sector. Thornton of course recognizes the importance of maintaining a sufficient gold reserve to conduct central bank operations: they must be sufficient to provision the occasional exchange, to defend the currency in international markets, and to meet any sudden extraordinary demand. However, a rigid one-to-one correspondence between gold and exchequer notes would unnecessarily commit the bank to, what is today called, countercyclical policy. That is, the necessity of reducing circulating money during a downturn.
The call for an interventionist central bank is clear. It is necessary for the monetary authority to engage counter-cyclically to demand shocks by maintaining the effective money supply (which likely requires an increase in the stock of notes issued because of the counteracting effect lack of confidence has on money velocity). In his evaluation of the Bank of England’s conduct during the crisis period, Thornton excuses the bank of culpability in precipitating the crisis; however, he faults it for not being expansionary enough—for “too much restricting its notes in the late seasons of alarm, than on that of too much enlarging them.”
Thornton is at pains in many places of his book to make clear his support for policy openness which can swiftly react to the exigencies of economic fluctuations. In the 20th century this would be labelled a “discretionary” as opposed to “rules-based” policy strategy. In chapter 7 he makes this point clear when discussing the decision to renew the Restriction Act. The ability of the authority to respond to the “particular circumstances of the times” (to exercise discretion) and not be bound to “any principle” (rigid set of rules) is paramount for the responsible management of the payments system.
Finally, Thornton expresses a clear understanding of “nominal wage stickiness” when he says “the rate of wages, we know is not so variable as the price of goods” which has implications for the duration of economic crises since the temporary distress in credit markets causes a fall in prices, squeezing profits between lower revenues and fixed labor costs, and ultimately “occasioning much discouragement of the fabrication of manufactures.” This story where a short-run demand shock translates into longer-run output gaps because money-wages don’t adjust anticipates later “hysteresis” theories. (That being said, I think some commentators overstate the affinities between Thornton and, in particular, Keynes on this point. For Keynes, nominal wage stickiness helps support the employment level by putting a floor under worker purchasing power and bolstering effective demand whereas Thornton sees it as a disequilbrium factor preventing full adjustment and is, therefore, squarely “classical” in the Keynesian sense here).
April 17, 2026
(1802) class
...The national bank, indeed, may fairly be called upon, in consideration of the benefits enjoyed through its monopoly, to submit to a considerable expense in supplying gold for the country; but
there must be some bounds to the claims which can equitably be made upon it: and, in estimating the benefit arising to the kingdom from the use of country bank notes, we have either to deduct the loss which the Bank of England incurs by maintaining an additional supply of gold sufficient to answer the demands which they occasion, or else we have to take into consideration the risk which the bank incurs by only keeping a fund of gold which is somewhat inadequate. The country banks may, perhaps, cause the bank in some measure to encrease its general fund of gold,
though not to hold so much of this unproductive article as.to afford a security equal to that which the bank would enjoy if no country bank notes existed.
It is obvious, that the additional capital given to the kingdom through the use of country bank notes must not be measured by the amount of those notes, but that a deduction must be made of
the sum kept in gold in the coffers of the issuers, as their provision for the occasional payments to which their bank paper subjects them. The other deduction, which has been spoken of, is of the
same nature. It is a second deduction, which must be made on account of a similar, and, perhaps, no less considerable provision for the payment of country bank notes, which is rendered necessary to be kept in the colters of the Bank of England. In other words, the capital given to the country, through the use of country bank notes, is only equal (and it was so stated in speaking of that subject) to the amount of the gold which they cause to be exported. I shall endeavour here to explain more particularly than has yet been done, some of those circumstances which cause a great
diminution of country bank notes to bring distress on London, and to end in a general failure of commercial credit.
In a former chapter it was observed, that when that alarm among the common people, which produces an unwillingness to take country bank paper, and an eagerness for gold has risen to a considerable height, some distrust is apt to be excited among the higher class of traders; and that any great want of confidence in this quarter produces an encreased demand for that article, which is, among London bankers and merchants, in much the same credit as gold;
.I mean Bank of England notes, and which forms, at all times, the
only circulating medium of the metropolis in all the larger transactions of its commerce. This more than usual demand for Bank of England notes the bank is at such a time particularly unwilling to
satisfy, for reasons which I shall endeavour fully to detail. The reader will have been prepared to enter into them by the observations on the subject of the bank, introduced towards the close of the
chapter which treated of that institution.
First, the bank may be supposed to be unwilling to satisfy that somewhat encreased demand for its notes which a season of consternation is apt to produce, because it is not unlikely to partake,
in some degree, in the general alarm, especially since it must necessarily be supposed to have already suffered, and to be still experiencing a formidable reduction of the quantity of its gold. The natural operation of even this general sort of fear must be to incline it to contract its affairs, and to diminish rather than enlarge its notes.
But it must also be recollected, that the bank has necessarily been led already to encrease its loans in the same degree in which its gold has been reduced, provided it has maintained in circulation
the accustomed quantity of notes. This point was explained in the chapter on the subject of the bank. The directors, therefore, must seem to themselves to act with extraordinary liberality towards
those who apply to them for discounts, if they only go as far as to maintain the usual, or nearly the usual, quantity of notes. The liberality in lending which they must exercise, if, when the gold is
low, they even augment their paper, must be very extended indeed. In order to render this subject more clear, let us suppose that an extra demand on the Bank of England for three millions of gold has been made through the extinction of the paper of country banks, and through the slower circulation and hoarding of gold which have attended the general alarm. Let us assume, also, that the bank, during the time of its supplying this gold,. has thought proper to reduce its notes one million. It will, in that case, have necessarily encreased its loans two millions. Let us further assume, as we not very unreasonably may, that the two millions of additional loans have been afforded, not to the government, who owe a large and standing sum to the bank (suppose eight or ten millions besides the bank capital), but exclusively to the merchants; and let the total
amount of loans antecedently afforded to the merchants be reckoned at four millions. The bank, in this case, will have raised its discounts to the merchants from four millions to six; that is, it will have encreased them one half, even though it has diminished its notes one million. This extension. of the accustomed· accommodation to the mercantile world must appear to call for the thanks of that body, rather than to leave any room for complaint; and yet it is plain
from reasoning, and, I believe, it might be also proved from experience, that it will not ease the pressure. The difficulties in London, notwithstanding this additional loan of two millions to the merchants will be somewhat encreased;·fora sum in gold, amounting to three millions, has been drawn from the bank by the London agents of the country bankers and traders, and has been sent by those agents into the country. London, therefore, has furnished for the country circulation three millions of gold; and it has done this by getting discounted at the bank two·additional millions of bills, for which it has received two of the millions of gold, and by sparing one million of its circulating notes as a means of obtaining the other million. This reduction of the usual quantity of notes is borne by the metropolis with peculiar difficulty at a time of general alarm. However liberally, therefore, the bankers and merchants may acknowledge themselves to have been already relieved by the bank, they will repeat, and will even urge more than ever, their application for
discounts. It may be observed, with a view to the further elucidation of
this part of our subject, that both the bank, and they who borrow of it, are naturally led to fix their attention rather on the amount of the loans furnished than on that of the notes in circulation. The
bank is used to allow to each borrower a sum bearing some proportion to his supposed credit; but seldom or never exceeding a certain amount. It is true, the various borrowers do not always in an equal degree avail themselves of their power of raising money at the bank; and, therefore, a material enlargement of the sum total of the bank loans may take place at a moment of difficulty, through the encreased use which some of the richer merchants then make of their credit, as well as through the creation of a few new borrowers at the bank. The directors also, in particular cases, may suffer their rule to be relaxed. The circumstance, however, of the general principle on which the bank ordinarily, and, indeed, naturally proceeds, being that of a limitation of the amount of each of its loans to individuals, must tend, as I conceive to place something like a general limit to the total sum lent. It must conduce to prevent the fluctuation in the bank loans from keeping pace with the variation in the necessities of the public, and must contribute to produce a reduction of notes at that season of extraordinary distrust, when the state of the metropolis, as was more fully remarked in a former part of this Work, calls rather for their encrease. That the borrowers at the bank are likely to pay no attention to the subject of the total quantity of notes in circulation, is easily shewn. They have, indeed, no means of knowing their amount. They can only judge of the liberality of the bank by the extent of its loans; and of this they form an imperfect estimate by the sum which they or their connexions have been able to obtain. Scarcely anyone reacts, that there may be a large encrease of the general loans of the bank, as well as possibly an extension of each loan to individuals, while there is a diminution of the number of bank notes; .and that the amount of the notes, not that of the loans, is the object on which the eye should be fixed, in order to judge of the facility of effecting the payments of the metropolis. It was remarked, in a former chapter, that the bank, at the time antecedent to the suspension of its cash payments, having diminished
the sum lent by it to government, and enlarged, though not in an equal degree that furnished to the merchants, the pressure on the merchants was not relieved, as was expected, by the encreased loan
afforded them, but even grew more severe. It was also shewn, that this could not fail to be the case, since the bank notes necessary for effecting the current payments of the metropolis were then
diminished, and since the additional loans afforded to the merchants only in part compensated for the new pressure which was created in the general money market of the kingdom, by the circumstance of the government being obliged to become a great borrower in
that market. Whenever the bank materially lessens its paper, similar pressure is likely to be felt. Neither the transfer of the bank loans from the government to the merchants, nor even a large
encrease of its loans, when that encrease is not carried so far as is necessary to the maintenance of the accustomed, or nearly the accustomed, quantity of bank paper, can prevent, as I apprehend,
distress in the metropolis; and this distress soon communicates itself to all parts of the kingdom. The short explanation of the subject is this. Many country banknotes having. disappeared, a
quantity of gold is called for, which is so much new capital suddenly needed in the country. The only place in which any supply of gold exists is the Bank of England. Moreover, the only quarter
from whence the loan of the new capital, under all the circumstances of the case, can come, is also the Bank of England; for the gold in the bank is the only dead or sleeping stock in the kingdom which is convertible into the new active capital which is wanted. The bank,
therefore, must lend the gold which it furnishes; it must lend, that is to say, to some individuals a sum equal to the gold which other individuals have taken from it: otherwise it does not relieve the
country. If it should be asked, Why does not the bank in such case demand something intrinsically valuable, instead of contenting itself with mere paper in return ?-the answer is, first, that if the bank were to receive goods in exchange for its gold, or, in other words, were to purchase goods, it would have afterwards to sell them; and it would then become a trading company, which it is forbid to be by its charter: it is allowed to traffic only in bullion. The answer is, secondly, that if it were to take goods as a mere security, and to detain them as such, it would then prevent their passing into consumption with the desirable expedition. By proceeding on either of these plans, it would also involve itself in a degree of trouble which would not be very consistent with the management of the business of a banking company·. It may be answered, thirdly, that the bills which the bank discounts, are, generally speaking, so safe, that the security either of goods, or stocks, or land, none of which are received in pledge by the directors, may be considered as nearly superfluous. Avery small proportion of the five per cent. discount, gained upon the bills turned into ready money at the bank, has compensated, as I believe, for the whole of the loss upon them, even in the years of the greatest commercial failures which have yet been known. The observations which have now been made sufficiently shew what is the nature of that evil of which we are speaking. It is an evil which ought to be charged not to any fault in the mercantile body, but to the defect of the banking system. It is a privation which the merchants occasionally experience of a considerable part of that circulating medium which custom has rendered essential to the punctual fulfilment of their engagements. In good times, the country banks furnish this necessary article, which they are enabled to do through the confidence ofthe people in general; but when an alarm arises, the country banks cease to give it out, the people refusing what they had before received; and the Bank of England, the only body by whose interposition the distress can be relieved, is somewhat unwilling to exercise all the necessary liberality, for the reasons which have been so fully mentioned. The merchants are some of the chief sufferers, and they are generally, also, loaded with no inconsiderable share of censure; but the public, the country banks, and the Bank of England, may more properly divide the blame. The mischief produced by a general failure of paper credit is
very considerable. How much such a failure interrupts trade and manufacturing industry, and, therefore, ultimately also tends to carry gold out of the country, has been already stated at large. It
also causes a great, though merely temporary, fall in the market price of many sorts of property; and thus inflicts a partial and very heavy loss on some traders, and throws extraordinary gain into the hands of others; into the hands, I mean, of those who happen to have superior powers of purchasing at the moment of difficulty. By giving to all banking,· as well as mercantile, transactions the appearance of perilous undertakings, it deters men of large property, and of a cautious temper, from following the profession of bankers and merchants. It creates no small uneasiness of mind, even among traders who surmount the difficulties of the moment. Above all, it reduces many respectable, prudent, and, ultimately, very solvent persons to the mortifying necessity of stopping payment; thus obliging them to share in that discredit, in which, it is much to be desired, that traders of an opposite character only should be involved. If, indeed, we suppose, as we necessarily must, that, on account of the multitude of failures which happen at the same time, the
discredit of them is much diminished, then another evil is produced, which, in a commercial country, is very great. Acts of insolvency, leaving less stigma on the character, become not so much dreaded as might be wished. The case of some, who bring difficulties on themselves, being almost unavoidably confounded with that of persons whose affairs have been involved through the entanglement of paper credit, to stop payment is considered too much as a misfortune or accident, and too little as a fault; and thus a principal incentive to punctuality in mercantile payments is weakened, and an important check to adventurous speculation is in some measure lost. The observations which have been made will, however, shew that the tendency of country bank paper to produce a general failure of paper credit, is an evil which may be expected to diminish; for,
first, if the Bank of England, in future seasons of alarm, should be disposed to extend its discounts in a greater degree than heretofore, then the threatened calamity may be averted through the generosity of that institution-. If, secondly, the country bankers should be taught (as, in some degree, unquestionably they must), by the difficulties which they have experienced, to provide themselves with a larger quantity of that sort of property which is quickly convertible into Bank of England notes, and, therefore, also, into gold, then the country bankers will have in their own hands a greater power of checking the progress of an alarm. Still, indeed, their resource will
be the gold which is in the bank. The encreased promptitude,however, with which the greater convertibility of their funds will enable them to possess themselves of a part of the bank treasure, will render a smaller supply of it sufficient; and this smaller supply may be expected to be furnished, without difficulty, either by means of such a trifling addition to the bank loans as the bank will not refuse, or by sparing the necessary sum from the paper circulation of the metropolis, which, if commercial confidence is not impaired, will always admit of some slight and temporary reduction. The Bank of England will itself profit by the circumstance of its gold becoming more accessible to the country banks; for the untoward event of a general failure of paper credit will thus be rendered less probable, and, therefore, a smaller stock of gold will be an equally sufficient provision for. the extraordinary demands at home to which the bank will be subject. Or if, thirdly, those among whom country bank notes circulate should learn to be less variable as to the confidence placed by them in country paper, or even to appreciate more justly the several degrees of credit due to the notes of different houses, then the evil which was before supposed to be obviated by the liberality of the Bank of England, or by the prudence of the country banker, will abate through the growth of confidence and the diffusion ,of commercial knowledge among the public. It
seems likely that, by each of these means, though especially in the second mode which was mentioned, the tendency of country bank notes to produce an occasional failure of commercial credit will be diminished. In time past, the mischief has been suffered to grow till
it appeared too formidable to be encountered; and this has happened partly in consequence of our wanting that knowledge and experience which we now possess. Another ill attending the present banking system in the country is the following. The multiplication of country banks issuing small notes to bearer on demand, occasioning a great and permanent diminution in
our circulating coin, serves to encrease the danger, lest the standard by which the value of our paper is intended to be at all times regulated should occasionally not be maintained.
The evils of a great depreciation of paper currency are considerable. In proportion as the article which forms the' current payment for goods drops in value, the current price of goods rises.
If the labourer receives only the same nominal wages as before the depreciation took place, he is underpaid
...The national bank, indeed, may fairly be called upon, in consideration of the benefits enjoyed through its monopoly, to submit to a considerable expense in supplying gold for the country; but
there must be some bounds to the claims which can equitably be made upon it: and, in estimating the benefit arising to the kingdom from the use of country bank notes, we have either to deduct the loss which the Bank of England incurs by maintaining an additional supply of gold sufficient to answer the demands which they occasion, or else we have to take into consideration the risk which the bank incurs by only keeping a fund of gold which is somewhat inadequate. The country banks may, perhaps, cause the bank in some measure to encrease its general fund of gold,
though not to hold so much of this unproductive article as.to afford a security equal to that which the bank would enjoy if no country bank notes existed.
It is obvious, that the additional capital given to the kingdom through the use of country bank notes must not be measured by the amount of those notes, but that a deduction must be made of
the sum kept in gold in the coffers of the issuers, as their provision for the occasional payments to which their bank paper subjects them. The other deduction, which has been spoken of, is of the
same nature. It is a second deduction, which must be made on account of a similar, and, perhaps, no less considerable provision for the payment of country bank notes, which is rendered necessary to be kept in the colters of the Bank of England. In other words, the capital given to the country, through the use of country bank notes, is only equal (and it was so stated in speaking of that subject) to the amount of the gold which they cause to be exported. I shall endeavour here to explain more particularly than has yet been done, some of those circumstances which cause a great
diminution of country bank notes to bring distress on London, and to end in a general failure of commercial credit.
In a former chapter it was observed, that when that alarm among the common people, which produces an unwillingness to take country bank paper, and an eagerness for gold has risen to a considerable height, some distrust is apt to be excited among the higher class of traders; and that any great want of confidence in this quarter produces an encreased demand for that article, which is, among London bankers and merchants, in much the same credit as gold;
.I mean Bank of England notes, and which forms, at all times, the
only circulating medium of the metropolis in all the larger transactions of its commerce. This more than usual demand for Bank of England notes the bank is at such a time particularly unwilling to
satisfy, for reasons which I shall endeavour fully to detail. The reader will have been prepared to enter into them by the observations on the subject of the bank, introduced towards the close of the
chapter which treated of that institution.
First, the bank may be supposed to be unwilling to satisfy that somewhat encreased demand for its notes which a season of consternation is apt to produce, because it is not unlikely to partake,
in some degree, in the general alarm, especially since it must necessarily be supposed to have already suffered, and to be still experiencing a formidable reduction of the quantity of its gold. The natural operation of even this general sort of fear must be to incline it to contract its affairs, and to diminish rather than enlarge its notes.
But it must also be recollected, that the bank has necessarily been led already to encrease its loans in the same degree in which its gold has been reduced, provided it has maintained in circulation
the accustomed quantity of notes. This point was explained in the chapter on the subject of the bank. The directors, therefore, must seem to themselves to act with extraordinary liberality towards
those who apply to them for discounts, if they only go as far as to maintain the usual, or nearly the usual, quantity of notes. The liberality in lending which they must exercise, if, when the gold is
low, they even augment their paper, must be very extended indeed. In order to render this subject more clear, let us suppose that an extra demand on the Bank of England for three millions of gold has been made through the extinction of the paper of country banks, and through the slower circulation and hoarding of gold which have attended the general alarm. Let us assume, also, that the bank, during the time of its supplying this gold,. has thought proper to reduce its notes one million. It will, in that case, have necessarily encreased its loans two millions. Let us further assume, as we not very unreasonably may, that the two millions of additional loans have been afforded, not to the government, who owe a large and standing sum to the bank (suppose eight or ten millions besides the bank capital), but exclusively to the merchants; and let the total
amount of loans antecedently afforded to the merchants be reckoned at four millions. The bank, in this case, will have raised its discounts to the merchants from four millions to six; that is, it will have encreased them one half, even though it has diminished its notes one million. This extension. of the accustomed· accommodation to the mercantile world must appear to call for the thanks of that body, rather than to leave any room for complaint; and yet it is plain
from reasoning, and, I believe, it might be also proved from experience, that it will not ease the pressure. The difficulties in London, notwithstanding this additional loan of two millions to the merchants will be somewhat encreased;·fora sum in gold, amounting to three millions, has been drawn from the bank by the London agents of the country bankers and traders, and has been sent by those agents into the country. London, therefore, has furnished for the country circulation three millions of gold; and it has done this by getting discounted at the bank two·additional millions of bills, for which it has received two of the millions of gold, and by sparing one million of its circulating notes as a means of obtaining the other million. This reduction of the usual quantity of notes is borne by the metropolis with peculiar difficulty at a time of general alarm. However liberally, therefore, the bankers and merchants may acknowledge themselves to have been already relieved by the bank, they will repeat, and will even urge more than ever, their application for
discounts. It may be observed, with a view to the further elucidation of
this part of our subject, that both the bank, and they who borrow of it, are naturally led to fix their attention rather on the amount of the loans furnished than on that of the notes in circulation. The
bank is used to allow to each borrower a sum bearing some proportion to his supposed credit; but seldom or never exceeding a certain amount. It is true, the various borrowers do not always in an equal degree avail themselves of their power of raising money at the bank; and, therefore, a material enlargement of the sum total of the bank loans may take place at a moment of difficulty, through the encreased use which some of the richer merchants then make of their credit, as well as through the creation of a few new borrowers at the bank. The directors also, in particular cases, may suffer their rule to be relaxed. The circumstance, however, of the general principle on which the bank ordinarily, and, indeed, naturally proceeds, being that of a limitation of the amount of each of its loans to individuals, must tend, as I conceive to place something like a general limit to the total sum lent. It must conduce to prevent the fluctuation in the bank loans from keeping pace with the variation in the necessities of the public, and must contribute to produce a reduction of notes at that season of extraordinary distrust, when the state of the metropolis, as was more fully remarked in a former part of this Work, calls rather for their encrease. That the borrowers at the bank are likely to pay no attention to the subject of the total quantity of notes in circulation, is easily shewn. They have, indeed, no means of knowing their amount. They can only judge of the liberality of the bank by the extent of its loans; and of this they form an imperfect estimate by the sum which they or their connexions have been able to obtain. Scarcely anyone reacts, that there may be a large encrease of the general loans of the bank, as well as possibly an extension of each loan to individuals, while there is a diminution of the number of bank notes; .and that the amount of the notes, not that of the loans, is the object on which the eye should be fixed, in order to judge of the facility of effecting the payments of the metropolis. It was remarked, in a former chapter, that the bank, at the time antecedent to the suspension of its cash payments, having diminished
the sum lent by it to government, and enlarged, though not in an equal degree that furnished to the merchants, the pressure on the merchants was not relieved, as was expected, by the encreased loan
afforded them, but even grew more severe. It was also shewn, that this could not fail to be the case, since the bank notes necessary for effecting the current payments of the metropolis were then
diminished, and since the additional loans afforded to the merchants only in part compensated for the new pressure which was created in the general money market of the kingdom, by the circumstance of the government being obliged to become a great borrower in
that market. Whenever the bank materially lessens its paper, similar pressure is likely to be felt. Neither the transfer of the bank loans from the government to the merchants, nor even a large
encrease of its loans, when that encrease is not carried so far as is necessary to the maintenance of the accustomed, or nearly the accustomed, quantity of bank paper, can prevent, as I apprehend,
distress in the metropolis; and this distress soon communicates itself to all parts of the kingdom. The short explanation of the subject is this. Many country banknotes having. disappeared, a
quantity of gold is called for, which is so much new capital suddenly needed in the country. The only place in which any supply of gold exists is the Bank of England. Moreover, the only quarter
from whence the loan of the new capital, under all the circumstances of the case, can come, is also the Bank of England; for the gold in the bank is the only dead or sleeping stock in the kingdom which is convertible into the new active capital which is wanted. The bank,
therefore, must lend the gold which it furnishes; it must lend, that is to say, to some individuals a sum equal to the gold which other individuals have taken from it: otherwise it does not relieve the
country. If it should be asked, Why does not the bank in such case demand something intrinsically valuable, instead of contenting itself with mere paper in return ?-the answer is, first, that if the bank were to receive goods in exchange for its gold, or, in other words, were to purchase goods, it would have afterwards to sell them; and it would then become a trading company, which it is forbid to be by its charter: it is allowed to traffic only in bullion. The answer is, secondly, that if it were to take goods as a mere security, and to detain them as such, it would then prevent their passing into consumption with the desirable expedition. By proceeding on either of these plans, it would also involve itself in a degree of trouble which would not be very consistent with the management of the business of a banking company·. It may be answered, thirdly, that the bills which the bank discounts, are, generally speaking, so safe, that the security either of goods, or stocks, or land, none of which are received in pledge by the directors, may be considered as nearly superfluous. Avery small proportion of the five per cent. discount, gained upon the bills turned into ready money at the bank, has compensated, as I believe, for the whole of the loss upon them, even in the years of the greatest commercial failures which have yet been known. The observations which have now been made sufficiently shew what is the nature of that evil of which we are speaking. It is an evil which ought to be charged not to any fault in the mercantile body, but to the defect of the banking system. It is a privation which the merchants occasionally experience of a considerable part of that circulating medium which custom has rendered essential to the punctual fulfilment of their engagements. In good times, the country banks furnish this necessary article, which they are enabled to do through the confidence ofthe people in general; but when an alarm arises, the country banks cease to give it out, the people refusing what they had before received; and the Bank of England, the only body by whose interposition the distress can be relieved, is somewhat unwilling to exercise all the necessary liberality, for the reasons which have been so fully mentioned. The merchants are some of the chief sufferers, and they are generally, also, loaded with no inconsiderable share of censure; but the public, the country banks, and the Bank of England, may more properly divide the blame. The mischief produced by a general failure of paper credit is
very considerable. How much such a failure interrupts trade and manufacturing industry, and, therefore, ultimately also tends to carry gold out of the country, has been already stated at large. It
also causes a great, though merely temporary, fall in the market price of many sorts of property; and thus inflicts a partial and very heavy loss on some traders, and throws extraordinary gain into the hands of others; into the hands, I mean, of those who happen to have superior powers of purchasing at the moment of difficulty. By giving to all banking,· as well as mercantile, transactions the appearance of perilous undertakings, it deters men of large property, and of a cautious temper, from following the profession of bankers and merchants. It creates no small uneasiness of mind, even among traders who surmount the difficulties of the moment. Above all, it reduces many respectable, prudent, and, ultimately, very solvent persons to the mortifying necessity of stopping payment; thus obliging them to share in that discredit, in which, it is much to be desired, that traders of an opposite character only should be involved. If, indeed, we suppose, as we necessarily must, that, on account of the multitude of failures which happen at the same time, the
discredit of them is much diminished, then another evil is produced, which, in a commercial country, is very great. Acts of insolvency, leaving less stigma on the character, become not so much dreaded as might be wished. The case of some, who bring difficulties on themselves, being almost unavoidably confounded with that of persons whose affairs have been involved through the entanglement of paper credit, to stop payment is considered too much as a misfortune or accident, and too little as a fault; and thus a principal incentive to punctuality in mercantile payments is weakened, and an important check to adventurous speculation is in some measure lost. The observations which have been made will, however, shew that the tendency of country bank paper to produce a general failure of paper credit, is an evil which may be expected to diminish; for,
first, if the Bank of England, in future seasons of alarm, should be disposed to extend its discounts in a greater degree than heretofore, then the threatened calamity may be averted through the generosity of that institution-. If, secondly, the country bankers should be taught (as, in some degree, unquestionably they must), by the difficulties which they have experienced, to provide themselves with a larger quantity of that sort of property which is quickly convertible into Bank of England notes, and, therefore, also, into gold, then the country bankers will have in their own hands a greater power of checking the progress of an alarm. Still, indeed, their resource will
be the gold which is in the bank. The encreased promptitude,however, with which the greater convertibility of their funds will enable them to possess themselves of a part of the bank treasure, will render a smaller supply of it sufficient; and this smaller supply may be expected to be furnished, without difficulty, either by means of such a trifling addition to the bank loans as the bank will not refuse, or by sparing the necessary sum from the paper circulation of the metropolis, which, if commercial confidence is not impaired, will always admit of some slight and temporary reduction. The Bank of England will itself profit by the circumstance of its gold becoming more accessible to the country banks; for the untoward event of a general failure of paper credit will thus be rendered less probable, and, therefore, a smaller stock of gold will be an equally sufficient provision for. the extraordinary demands at home to which the bank will be subject. Or if, thirdly, those among whom country bank notes circulate should learn to be less variable as to the confidence placed by them in country paper, or even to appreciate more justly the several degrees of credit due to the notes of different houses, then the evil which was before supposed to be obviated by the liberality of the Bank of England, or by the prudence of the country banker, will abate through the growth of confidence and the diffusion ,of commercial knowledge among the public. It
seems likely that, by each of these means, though especially in the second mode which was mentioned, the tendency of country bank notes to produce an occasional failure of commercial credit will be diminished. In time past, the mischief has been suffered to grow till
it appeared too formidable to be encountered; and this has happened partly in consequence of our wanting that knowledge and experience which we now possess. Another ill attending the present banking system in the country is the following. The multiplication of country banks issuing small notes to bearer on demand, occasioning a great and permanent diminution in
our circulating coin, serves to encrease the danger, lest the standard by which the value of our paper is intended to be at all times regulated should occasionally not be maintained.
The evils of a great depreciation of paper currency are considerable. In proportion as the article which forms the' current payment for goods drops in value, the current price of goods rises.
If the labourer receives only the same nominal wages as before the depreciation took place, he is underpaid
January 2, 2022
Thorton te lleva a través de la historia del crédito y la moneda de Inglaterra explicando el funcionamiento, el surgimiento y las medidas que deben tomarse para un correcto proceder de los bancos. Habla tanto del banco central de Inglaterra como de los provinciales y trata su relación, también compara el Banco de Inglaterra con los otros bancos centrales del continente europeo, mostrando asi sus deficiencias. Considero un libro de lectura esencial para los ciemporcientistas, ya que les hará reflexionar sobre su posición, debido a el constante reto que supone refutar los argumentos de este brillante autor que hace mano de los escritos de Hume para evidenciar grasos errores que se cometen al hablar de teoria monetaria. En conclusión, es un libro que uno debe leer si desea comprender el funcionamiento de un banco y cuál debería ser su correcto proceder y al acabarlo se hace obvio porque intelectuales del tallaje de Hayek o Schumpeter lo citan
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