It is obvious, from the very nature of banking, that the stock of specie reserved by a bank for the payment of such demands as may be made upon it, cannot bear any proportion to the amount of its notes in circulation ; and that, if a certain of these notes should at any time be suddenly return ed for payment, a suspension of its cash payments must be the inevitable consequence. This is an evil inherent in the very nature of paper currency, against which no caution can duly provide, since the • , profit of the banker is exactly in proportion to the excess of his circulating paper over the specie reser- 'ved for its payment.
A bank, and more especially a national bank, may be subjected to demands for. specie from either of the two following causes ; 1st, From an unfavourable balance of trade ; or, 2dly, From domestic alarm.
1. When the imports of a nation exceed its ex ports, a balance of debt will remain due to foreign countries ; and in, the country which owes the ba lance there will be a greater demand for money abroad than for money at home. If the unfa vourable balance of trade continues, the demand • for money abroad, with which the balance may be discharged, will increase, and foreign money, or bills on foreign bankers, will be sold for a premium. In this case, there arises a temptation to export the coin of ;he country, which, from the state of trade, has become more valuable abroad than at home ; and where a national bank is established, whose notes are convertible into cash at the will of the holder, it may undoubtedly be exposed, by an unfavourable balance of trade, to demands for specie to a consi derable amount. But, in the nature of things, the drain of specie from this cause must be slow and gradual, and where a bank has ample funds where with to purchase specie, it can hardly ever, in this case, be driven to the exceptionable measure of sus pending its cash payments. The Bank of England has frequently been exposed, from this or from simi lar causes, to a regular drain of its specie ; but its credit was in no danger from those demands, because its coffers could always be replenished as fast as they were exhausted. Prior to the great recoinage, in 1774, the gold currency of this country was in a very debased state ; the market price of gold rose, in consequence, above its mint price ; and the value of bank-notes was lowered to the standard of the debased coin, for which they were currently inter changed. In these circumstances, it was a profit able transaction to procure bank-notes for their no minal price in light and worn guineas, and to return them upon the Bank for the same nominal price in guineas of their standard weight, which last were melted down and sold for bank-notes at the market price of bullion • and these notes were immediately returned upon the Bank in exchange for a new sup ply of standard guineas, to be again melted and sold. In consequence of this state of the currency, the Bank of England was subjected to a constant and regular drain of its specie, and tog very great an nual expellee in replacing the guineas of which it was drained. But there was no risk that this drain, however expensive and troublesome. would ever lead to a suspension of its cash payments, because it was regular and gradual, and subject to calculation ; so that, as long as the Bank had wherewithal to pur chase guineas, they could always be provided in suf
. ficient quantity to answer the demand.
In like manner, though a public bank, from an un favourable balance of trade, or from a great expendi ture abroad, may undoubtedly be exposed to an in convenient drain of its specie, it seems scarcely pos-` Bible that this drain can be so rapid as to endanger its credit. It is not in the nature of trade to pro duce any such sudden and unexpected crisis. The operations of trade alvtays leave time for some pre vious arrangement, and they have generally some respect also to the convenience of all the parties concerned. It is well known, for example, that in the case of a heavy accumulation of foreign debt, from whatever cause, the balance is more frequently dis charged by an exportation of goods than of specie. The effect of foreign debt is to depress the exchange ; an unfavourable exchange, or, in other words, the high price of money abroad, operates as an induce ment to export goods ; the exporter, besides his usual profit, gaining an additional profit equal to the difference of the exchange. It will always be ob served, therefore, that a great foreign expenditure is very soon followed by a large exportation of goods, and though specie may be partly remitted for its dis charge, the produce of the country is found to an . swer the purpose equally well. From the year 1793 to 1797, the foreign exportation' of this country on. the Continent of Europe and to the West Indies, . amounted to L. 33,510,779 ;• and in consequence of these heavy expenses abroad, the Bank was sub jected to demands for specie to a considerable amount. But though the Directors of the Bank, in their correspondence with the Government, cora plain heavily of the loss of specie which the Bank. had experienced, and though, in February 1796, they even go the length of formally recording it as their opinion, that any farther advance to the Em- . peror of Germany, or any foreign state, would be fatal to the Bank, t this opinion seems evidently to have been the result of undue apprehension, and to have been expressed strongly for the purpose of deterring the Chancellor of the Exchequer from per severing in his system of lavish advances to foreign powers, the effect of which, they justly conceived, . would be injurious to the Bank, by subjecting it to a farther and very inconvenient drain of its specie. But since, in the course of the three several years of 1794, 1795, and 1796, the foreign expenditure of the coun try amounted to something more than L.8,000,000, L.11,000,000, and L.10,000,000, without injuring the credit of the Bank, it can hardly be believed that an additional expenditure of L.3,000,000, or even L. 4,000,000, could have given such a sudden shock to its credit, as to have occasioned the sus pension of its cash payments. Nor do the Directors, although they express generally their uneasiness at the drain of their specie, ever seem to have plated such a catastrophe. On the contrary, the Governor and Deputy-governor, when examined be fore the Secret Committee of the House of Lords, state that they did not apprehend imminent danger previous to the 21st February 17974 From all these circumstances, therefore, it appears that the.