Of the Refinements of Credit of General Banks The national Bank of London is composed of a large number of shareholders who make choice of Directors to govern its operations. Their primitive advantage consisted in making a yearly distribution of the profits made by interest on the money lent out of the Bank deposits. Later the public debt was incorporated with it, on which the State pays an annual interest.
In spite of such a solid foundation when the Bank had made large advances to the State and the holders of notes were apprehensive that the Bank was in difficulties, a run on the Bank has been seen and holders of notes went in crowds to the Bank to draw out money. The same thing happened on the collapse of the South Sea Company in 1720.
The refinements introduced to support the Bank and moderate its discredit were first to set up a number of clerks to count out the money to those bringing notes, to pay out large amounts in sixpences and shillings to gain time, to pay some part to individual holders who had been waiting whole days to take their turn; but the most considerable sums were paid to friends who took them away and brought them back secretly to the Bank to repeat the same manoeuvre the next day. In this way the Bank saved its appearance and gained time until the panic should abate. But when that did not suffice the Bank opened a subscription engaging trusty and solvent people to join as guarantors of large amounts to maintain the credit and circulation of the Bank notes.
It was by this last refinement that the credit of the Bank was maintained in 1720 when the South Sea Company collapsed. As soon as it was publicly known that the subscription list was filled by wealthy and powerful people, the run on the Bank ceased and deposits were brought in as usual.
If a Minister of State in England, seeking to lower the rate of interest or for other reasons, forces up the price of public stock in London and if he has enough credit with the Directors of the Bank (under the obligation of indemnifying them in case of loss) to get them to issue a quantity of bank notes without backing, begging them to use these notes themselves to buy several blocks and capitals of the public stock, this stock will not fail to rise in price through these operations, And those who have sold stock, seeing the high price continue, will perhaps decide (so as not to leave their bank notes idle and thinking from the rumours spread about that the rate of interest will fall and the stock go up further in price) to buy it back at a higher price than they sold it for, If several people seeing the agents of the Banks buy this stock step in and do likewise thinking to profit like them, the public funds will increase in price to the point which the Minister wishes. And it may happen that the Bank will cleverly resell at a higher price all the stock it has purchased at the Minister's request, and will not only make a large profit on it but will retire and cancel all the extraordinary banknotes which it had issued.
If the Bank alone raises the price of public stock by buying it, it will by so much depress it when it resells to cancel its excess issue of notes. But it always happens that many people wishing to follow the Agents of the Bank in their operations help to keep up the price. Some of them get caught for want of understanding these operations, in which there enter infinite refinements or rather trickery which lie outside my subject.
It is then undoubted that a Bank with the complicity of a Minister is able to raise and support the price of public stock and to lower the rate of interest in the State at the pleasure of this Minister when the steps are taken discreetly, and thus pay off the State debt. But these refinements which open the door to making large fortunes are rarely carried out for the sole advantage of the State, and those who take part in them are generally corrupted. The excess banknotes, made and issued on these occasions, do not upset the circulation, because being used for the buying and selling of stock they do not serve for household expenses and are not changed into silver. But if some panic or unforeseen crisis drove the holders to demand silver from the Bank the bomb would burst and it would be seen that these are dangerous operations.
