In two countries, one paying bills of exchange in currency, the other in bank money, it is evident that the computed exchange may be in favour of that which pays in bank money, though the real exchange should be in favour of that which pays in currency, pp. 50–53.

Digression concerning Banks of Deposit, particularly concerning that of Amsterdam.

THE currency of a great state, such as England, consists for the most part of its own coin. Should this currency be at any time degraded below its standard value, the state can, by a reformation of its coin, reestablish its currency. But the currency of a small state, such as Hamburg, seldom consists altogether in its own coin, but is made up of the coins of all the neighbouring states. Such a state, by reforming its coin, will not always reform its currency. If foreign bills of exchange are paid in this currency, the uncertain value of any sum must render the exchange always very much against such a state. In order to remedy this inconvenience, such small states have frequently enacted that foreign bills of certain value should be paid by a transfer in the books of a certain bank, which is obliged to pay in good and true standard money. The banks of Hamburg, Amsterdam, &c., were established with this view. The money of such banks, being better than the currency, bore an agio. The agio of the bank of Hamburg is about 14 per cent., pp. 53, 54.

Before 1609, the currency of Amsterdam was 9 per cent. below fresh money from the mint. The merchants could not always find a sufficient quantity of good money to pay their bills of exchange, and the value of those bills became uncertain. To remedy this, a bank was established under the guarantee of the city. This bank received all sorts of coin at its intrinsic value in the good standard money of the country, deducting the

expense of coinage and of management, and gave a credit for it in its books. This credit was called bank money, which was always of the same real value, and worth more than the currency. It was enacted that all bills of exchange drawn upon or negotiated at Amsterdam, of the value of 600 guilders and upwards, should be paid in bank money. Consequently every merchant was obliged to keep an account with the bank in order to pay his bills of exchange, which occasioned a certain demand for bank money, p. 54.

Bank money has other advantages; it is secure from accidents, and can be paid away by simple transfer. In consequence of these advantages, it has always borne an agio. The money deposited in the banks is believed to remain there, nobody caring to demand payment from the bank of a debt which he could sell for a premium. Besides, by being brought from the bank it lost all the advantages of bank money, nor could it be brought from its coffers without paying for the keeping. Those deposits of coin constituted the original capital of the bank. It now gives credit upon deposits of gold and silver bullion, at about 5 per cent. below the mint price. It grants a receipt entitling the bearer to take out the bullion within six months, upon transferring to the bank a quantity of bank money equal to that for which credit had been given, and upon paying per cent. for keeping if the deposit was in silver, and per cent. if it was in gold; but in default of such payment, and upon the expiration of this term, the deposit should belong to the bank at the price at which it had been received, pp. 54-56.

Deposits of bullion are commonly made when the price is lower than ordinary, and they are taken out when it happens to rise. A person can generally sell his receipt for the difference between the mint price of bullion and the market price. A receipt for bullion is generally worth something, and it seldom happens,

therefore, that anybody suffers his receipt to expire, or allows his bullion to fall to the bank, at the price at which it had been received, pp. 56, 57.

The person who by making a deposit of bullion obtains both a bank credit and a receipt, pays his bills of exchange with his bank credit, and either sells or keeps his receipt, according as he judges that the price of bullion is likely to rise or fall. The owners of bank credit and the holders of receipts constitute two different sorts of creditors against the bank. The holder of a receipt cannot draw out bullion without reassigning to the bank a sum of bank money equal to the price at which the bullion had been received. If he has no bank money he must purchase it. The owner of bank money cannot draw out bullion without a bank receipt for the quantity he wants. The price of the receipts and the price of the bank money make up between them the full value of the bullion, pp. 57, 58.

The bank grants receipts and bank credits upon deposits of the current coin, but these receipts are frequently of no value in the market, and therefore are frequently (as they express it) allowed to 'fall to the bank.' The sum of bank money for which the receipts are expired must be considerable. It must comprehend the whole original capital of the bank. But the proportion which it bears to the whole mass of bank money is supposed to be very small. No demand can be made on the bank but by means of a receipt. The bank money, for which receipts are expired, is mixed with that for which they are still in force: so that, though there may be a considerable sum of bank money for which there are no receipts, there is no specific sum which may not be demanded by one. The owner of bank money cannot demand payment without a receipt. In ordinary times he can find no difficulty in getting one to buy at the market price. It might be otherwise during a public calamity, as that of an invasion. In

such an emergency the bank might, perhaps, pay the owners of bank money who could get no receipts the value of what they were credited for in their books, paying 2 or 3 per cent. to such holders of receipts as had no bank money, pp. 58, 59.

In ordinary times it is the interest of the holders of receipts to depress the agio, in order to buy bank money cheaper, or to sell their receipts dearer. It is the interest of the owners of bank money to raise the agio, in order to sell their bank money dearer, or to buy a receipt cheaper. To prevent stock-jobbing tricks, the measures taken by the bank never permit the agio to be more than 5 nor less than 4 per cent., p. 60.

The bank of Amsterdam professes to lend out no part of what is deposited in it; and no point of faith is better established, than that of every guilder circulated as bank money, there is a corresponding guilder in gold or silver in the treasure of the bank.1 In 1672, when the French king was at Utrecht, the bank of Amsterdam paid so rapidly as left no doubt of the fidelity with which it had observed its engagements, pp. 60, 61.

The amount of the treasure of the bank cannot be known, but three millions sterling is probably the utmost extent, which is quite sufficient to carry on a very extensive circulation. The city of Amsterdam derives considerable revenue from the bank. Beside what may be called warehouse rent, there are fees upon opening every new account, and also for every transfer; likewise forfeits from every person who neglects to balance his accounts twice in the year. The bank is supposed to make a profit by the sale of foreign coin or bullion, which sometimes falls to it by expiring receipts. It makes a profit by selling bank money at 5, and buying it at 4, per cent. Public utility, however, and not revenue, was the original object of this institution. The

For an account of the manner in which the directors of the bank subsequently betrayed their trust, see M'Culloch's note.

exchange generally appears to be in favour of the countries which pay in bank money, and against those which pay in currency: for the former pay in a species of money of which the intrinsic value is always the same; the latter is a species of money of which the intrinsic value is always varying, and generally below the standard, pp. 61, 62.

PART II.

Of the unreasonableness of those extraordinary restraints upon other principles.

Nothing can be more absurd than the whole doctrine of the balance of trade. When two places trade with one another this doctrine supposes that if the balance be equal neither of them gains or loses, but that if it leans to one side, one of them loses and the other gains. Both suppositions are false. A trade which is forced by means of bounties and monopolies is commonly disadvantageous to the country in whose favour it is meant to be established. But a trade which, without constraint, is carried on between any two places, is always advantageous, though not always equally so, to both. By advantage is understood, not an increase of gold and silver, but that of the exchangeable value of the annual produce of the land and labour of the country. If the balance be equal, and the trade consist in the exchange of their native commodities, they will, on most occasions, gain equally; each will afford a market for a part of the surplus produce of the other, pp. 62-64.

If the one export nothing but native commodities, and the returns of the other consisted altogether in foreign goods, the balance would be supposed equal, commodities being paid for with commodities. The inhabitants of that country which exported nothing but native commodities would gain most, since the