The British Banks: Fractional Reserve

The constitution of the banks in Britain differs widely from that in Amsterdam.

Here, only around 1/6 of the money is kept for answering demands. The rest is employed in trade.

Originally, they were on the same footing with the Amsterdam bank, but the directors took liberty to send out the money and gradually came to their present situation.

The ruin of a bank would not be so dangerous as is commonly imagined.

If all the money in Scotland was issued by one bank and it became bankrupt:

• very few individuals would be ruined by it because the amount of paper that people have in their hands bears no proportion to their wealth.
• the wealth of the whole country would not be much hurt by it, because 1% of the country’s riches does not consist in money.

The only method to prevent the bad consequence from the ruin of banks is to=

• give monopolies to none, and
• encourage the creation of as many as possible.

When several are established in a country, a mutual jealousy prevails. They are continually making unexpected runs on one another which then puts them on their guard. It obliges them to provide themselves against such demands.

If there were just one bank in Scotland, it might be more enterprising, as it would have no rival. By mismanagement, it might become bankrupt.

But having many banks puts this beyond all danger. Even if one did break, everyone would have very few of its notes. Thus, it is a bad policy to restrain the creation of many banks.

Several political writers have published treatises to show the pernicious nature of banks and paper money.

Thomas Mun was a London merchant. He published a treatise with this intention, as a reply to a book written to show the benefits of banks and paper money. He says that:

• England will go to ruin if it is drained of its money.
• The circulation of paper banishes gold and silver from the country.
• With less money, we would have less goods.

• Money never decays and a stock of it will last forever.
• By keeping up a stockpile of money in the country, we ensure that our riches will last as long as the world stands.

This reasoning was thought very satisfactory back then, but is absurd today.

Some time after that, Mr. Gee, also a merchant, wrote with the same intention.

He tried to show that England would soon be ruined by foreign trade.

• By the foreign exchange, he calculates that the balance is always against us.
• Consequently, we are losers in most of our foreign commercial dealings
• This loss drains us of our money and so we must soon come to ruin.

This is also absurd. Foreign commerce was not stopped by any regulations. The nation has prodigiously increased in riches, and is still increasing.

He proposed some regulations to prevent our ruin from our loss in the balance of trade. If the government had been so foolish as to have complied with, they would more probably have impoverished the nation.

Mr. Hume published some essays showing the absurdity of these and other such doctrines.

He proves very ingeniously that money always bears a certain proportion to the amount of commodities in every country.

Whenever money is accumulated beyond the proportion of commodities:

• the price of goods will necessarily rise
• this reduces the country’s exports which are undersold overseas
• this causes the country’s money go to overseas to correct the over-accumulation

On the contrary, whenever the amount of money is less than the proportion of goods, the price of goods fall.

• the country can export more to undersell others overseas
• money floods into the country to correct the under-accumulation

Thus, money and goods will keep near about a certain level in every country.

Mr. Hume’s reasoning is exceedingly ingenious. However, he seems to have gone a little into the notion that public opulence consists in money.

Human industry always multiplies goods and money together, though not always in the same proportion.

The labour of men will always be employed in producing whatever is the object of human desire. Things will increase in proportion as it is in the power of man to cultivate them.

Grains and other produce will always be produced more plentifully than gold and precious stones because they are more within the reach of human industry.

By proper agriculture, almost any part of the earth’s surface can produce grain. But gold cannot be found everywhere. Even where it is found, it lies concealed in the bowels of the earth.

A long time and much labour are needed to produce a small amount of it. This is why metal money never increases in proportion to the increase of goods.

Consequently, metal money will be sold more cheaply the richer a country becomes.

In savage nations, money gives a vast price because their only money is what they get by plunder. They do not know what is needed to produce money in their own country.

But when a nation arrives at a certain degree of improvement in the arts, the value of money diminishes. They then begin to search the mines and make it themselves.

From the fall of the Roman Empire to the discovery of the West Indies, the value of money was very high, and continually increasing.

Since that latter period its value has decreased considerably. Mr. Locke also published a treatise to show the pernicious consequences of allowing the nation to be drained of money.

His notions were also founded on the idea that public opulence consists in money. Though he treats it in a more philosophical light.

He affirms, with Mr. Mun, that:

• if there is no money in a nation it must soon come to ruin
• all commodities are soon spent, but money lasts for ever.

Our riches do not consist in money but commodities because money cannot be used for any of life purposes, but commodities can.

The ‘consumptibility’ of goods is the great cause of human industry. An industrious people will always produce more than they consume.

It is easy to show how small a proportion the cash in every country bears to the public opulence. It is generally supposed that there are 30 million of money circulating in Britain.

But the annual consumption is much more than 100 million. At a population of 10 million and allowing 10 pounds per annum for the subsistence of each person, which is by much too little, the whole annual consumption amounts to 100 million.

So it appears that the circulating cash bears but a small proportion to the whole opulence of the country. However, it is probable that there are less than 30 million people in Britain.

In this case, the proportion will be still less. Some who support the notion that the country’s riches consists in money, say that when a person retires from trade he turns his stock immediately into cash.

This is because money is the instrument of commerce.

A man can change it for the necessaries and elegancies of life more easily than anything else. Even the miser who locks up his gold in his chest has this end in view. No man hoards up money for its own sake.

He considers that by keeping money always by him, he can supply at once all the necessities of himself and his family. The opinion that riches consist in money is absurd in speculation.

It has caused so many prejudicial errors in practice, such as the following.