Advantages of Bank Prudence

⁶¹ For a long time, Scottish banks were very careful to require frequent and regular repayments from all their customers They did not deal with any person of any fortune or credit who did not make frequent and regular operations with them.

By this attention:

• they saved the extraordinary cost of replenishing their coffers
• they also gained two other very considerable advantages=

1. ⁶² They could tolerably judge the thriving or declining circumstances of their debtors.

The only evidence they needed was what their own books gave them.

Men are regular or irregular in their repayments, as their circumstances are thriving or declining.

• A private man who lends to a dozen debtors, can constantly and carefully inquire into each of the debtor’s situation by himself or through his agents.

But a bank which lends to 500 people can have no regular information on the conduct and circumstances of most of its debtors beyond what its own books provide.

The Scottish banks probably had this advantage in view when they required frequent and regular repayments from all their customers.

2. ⁶³ They could avoid issuing more paper money than what the national circulation needed.

When they observed that a customer’s repayments were equal to their advances, they knew that the paper money they advanced did not exceed the gold and silver money that he needed.

It meant that the paper money which the bank circulated through their customers did not exceed the amount of metal money needed to circulate in the country had there been no paper money.

The frequency, regularity, and amount of his repayments would demonstrate that their advances did not exceed his ready money for answering occasional demands.

His repayments meant that all his capital was constantly employed.

The money part of his capital is continually returning to and leaving from every dealer.

If the lendings of the bank exceeded the money part of his capital, his ordinary repayments would be insufficient to pay those ordinary lendings.

Because of his dealings, the stream running into the bank would be less than the one running out.

With the commerce the same, the excessive amount of paper might soon exceed the total amount of gold and silver needed to circulate in the country, had there been no paper money.

The excessive paper money would immediately have returned upon the bank to be exchanged for gold and silver.

This second advantage was not perhaps well understood by the Scottish banks as the first advantage.

⁶⁴ After traders receive discounted bills and cash accounts, they should not expect any more assistance from banks.

In this case, the banks cannot lend more without endangering its own interest and safety.

A bank cannot lend to a trader the whole or even most of the money with which he trades because, though that money is continually returning to and leaving from him:

• the total returns is too distant from the total outgoings, and
• the sum of his repayments could not equal the sum the lendings in a timely manner.

A bank could still less afford to lend fixed capital to the merchant, examples of which are:

• the capital used by an iron forge owner for his smelting-house, workhouses, warehouses, etc.,
• the capital employed by a mine owner in sinking his shafts, getting engines to draw out water, making roads, etc., and
• the capital employed by land improvers in clearing, draining, enclosing, manuring, and ploughing uncultivated fields and in building farm-houses with stables, granaries, etc.

The returns of the fixed capital are much slower than the returns of the circulating capital.

Such expences, even done with the greatest prudence and judgment, return to the entrepreneur only after many years.

• Many years is too far to suit the bank’s conveniency.

Such entrepreneurs may properly do most of their projects with borrowed money.

• Their capital should be enough to ensure the capital of those creditors.

The entrepreneurs should ensure that those creditors would not incur any loss, even if the project would not be so successful. Even with this precaution, the borrowed money which would not be repaid for several years, should not be borrowed from a bank. It should be borrowed upon bond or mortgage of private people who can live on the interest of their money without taking the trouble to employ the capital themselves.

Such private people should be willing to lend that capital to creditable entrepreneurs who will keep it for several years.

A bank that does the following would be a very convenient creditor to such traders:

• lends money without the expence of stamped paper or attorneys’ fees for drawing bonds and mortgages, and
• accepts the easy repayment terms of Scotish banks.

But such traders would be the most inconvenient debtors to such a bank.