On the other hand, the benefits to be derived from banking, in proportion to its extent, would seem to be greater, the nearer instruments are to the more quickly returning orders, and the greater consequently the scarcity of specie.Where, therefore, the accumulative principle being strong, and from the implied intelligence, and honesty of the community, the system of banking extensively practicable, but from want of time to work up materials to more slowly returning orders, instruments are at those of quicker return, there the operations of the banker are peculiarly beneficial.
We have, perhaps, sufficiently enlarged already, on the three first of the circumstances referred to.It only remains, to show the chief points of connexion of the last of them, with the principles it has been attempted to explain.To do so, it is necessary to refer to the occasional evils resulting from the system of banking, diminishing its general utility.
They may be reduced to two.
1st.The money which bankers circulate, must be the representative of real property.It must be exchangeable for some commodity, or commodities, equal to the amount at which it is rated.If it may be always exchanged for specie, or for some proportion of the general revenue abstracted for the purposes of government, it will be a representative of something real.
But it sometimes happens that bankers squander, or waste, the funds provided for payment of the demands to which they are liable, and this being discovered, their money becomes valueless, and those holding it as an equivalent to capital, sustain loss to the amount they bold.The loss thus sustained, both in itself, and in the general diminution of confidence in banking transactions and retardation of exchanges consequent on it, makes it a matter of great importance to every mercantile community, to have banks of indubitable solvency established throughout it.It were beyond the present purpose, to inquire into the particular system and regulations that may best produce such a result.There are, however, two general observations, arising from the nature of things, which naturally present themselves.
When capital is largely accumulated, and at orders of slow return, there will be very many, who will be disposed to allow their funds to remain in that employment, and be content with the moderate revenue thus produced to them.When, on the other hand, they are at orders of quicker return, there is a great temptation to divert the fired, set apart for these purposes, to speculations promising great gain, but sometimes producing great loss.
Banking will consequently be in general safest, where capital is most largely accumulated.
Again, as no possible precaution can prevent a company of bankers from acting dishonestly, who are willing to combine for such a purpose, for they can only be required to produce statements drawn up by themselves, where there exists a great deficiency of real principle, and a proneness to defraud, banking becomes dangerous or impracticable.
2d.The second evil arising from the practice of banking, has its origin, in the system of credit itself; and the shock which, as it is rounded on prevailing opinion, it is liable to receive from whatever shakes public confidence.
Every person engaged in the formation and transfer of commodities, and adopting the system of credit as the medium of transfer, is indebted to some individuals, as, in turn, other individuals are indebted to him.The stock also of instruments he has on hand, allows him to offer a certain amount of commodities for sale, and requires him, if he continue his business on the same footing, to purchase certain other commodities, and pay for certain amounts of labor.What is owing him, and payable within a given time, may exceed what he owes others, payable within the same time, or may equal it, or come short of it.What he is able to sell others within a given time, may also exceed what he requires to buy within the same time, or may be equal to, or less than it.It will always be the case, too, that individuals will look forward for the means of discharging the debts they have contracted, not only to the debts owing them by others, but to the sales they expect to effect.Were this to happen only to persons of really abundant capital, there would be no reason to fear the non-performance of engagements contracted.But it also happens to those, whose capitals bare been reduced by misfortune or imprudence, and therefore, there are always many in every mercantile community, whose ability to discharge their obligations is more or less doubtful.When, therefore, any cause operating extensively, and prejudicially, on mercantile transactions occurs, it generally happens, that there arise cases of incapacity to meet engagements, and, as one man depends for the means of discharging his debts, on the debts others owe him, that embarrassment and distress spread throughout the whole mercantile body.The experience of the misfortunes attending this.state of things, leads every one engaged in business, when he thinks there is reason to fear its approach, to endeavor to withdraw himself from the danger, by avoiding to contract obligations to pay.There is consequently a general diminution of purchases, and a general temporary fall in prices.(53)But while prudent people are thus able to secure themselves from evil, they increase the difficulties of those, who have contracted obligations to pay, in dependence on the proceeds of sales to be effected; and some of these becoming incapable of obtaining the means of meeting their engagements, their failure increases the general distress, and farther lessens the number inclined to purchase.
At this conjuncture, the affairs of the banker undergo a revolution.
