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Book II, Chapter II, 6
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In the midst of this clamour and distress, a new bank was established in Scotland, for the express purpose of relieving the distress of the country. The design was generous; but the execution was imprudent, and the nature and causes of the distress which it meant to relieve, were not, perhaps, well understood. This bank was more liberal than any other had ever been, both in granting cash-accounts, and in discounting bills of exchange. With regard to the latter, it seems to have made scarce any distinction between real and circulating bills, but to have discounted all equally. It was the avowed principle of this bank to advance upon any reasonable security, the whole capital which was to be employed in those improvements of which the returns are the most slow and distant, such as the improvements of land. To promote such improvements was even said to be the chief of the public-spirited purposes for which it was instituted. By its liberality in granting cash-accounts, and in discounting bills of exchange, it, no doubt, issued great quantities of its bank notes. But those bank notes being, the greater part of them, over and above what the circulation of the country could easily absorb and employ, returned upon it, in order to be exchanged for gold and silver, as fast as they were issued. Its coffers were never well filled. The capital which had been subscribed to this bank, at two different subscriptions, amounted to one hundred and sixty thousand pounds, of which eighty per cent. only was paid up. This sum ought to have been paid in at several different instalments. A great part of the proprietors, when they paid in their first instalment, opened a cash-account with the bank; and the directors, thinking themselves obliged to treat their own proprietors with the same liberality with which they treated all other men, allowed many of them to borrow upon this cash-account what they paid in upon all their subsequent instalments. Such payments, therefore, only put into one coffer what had the moment before been taken out of another. But had the coffers of this bank been filled ever so well, its excessive circulation must have emptied them faster than they could have been replenished by any other expedient but the ruinous one of drawing upon London; and when the bill became due, paying it, together with interest and commission, by another draught upon the same place. Its coffers having been filled so very ill, it is said to have been driven to this resource within a very few months after it began to do business. The estates of the proprietors of this bank were worth several millions, and, by their subscription to the original bond or contract of the bank, were really pledged for answering all its engagements. By means of the great credit which so great a pledge necessarily gave it, it was, notwithstanding its too liberal conduct, enabled to carry on business for more than two years. When it was obliged to stop, it had in the circulation about two hundred thousand pounds in bank notes. In order to support the circulation of those notes, which were continually returning upon it as fast as they were issued, it had been constantly in the practice of drawing bills of exchange upon London, of which the number and value were continually increasing, and, when it stopt, amounted to upwards of six hundred thousand pounds. This bank, therefore, had, in little more than the course of two years, advanced to different people upwards of eight hundred thousand pounds at five per cent. Upon the two hundred thousand pounds which it circulated in bank notes, this five per cent. might perhaps be considered as a clear gain, without any other deduction besides the expense of management. But upon upwards of six hundred thousand pounds, for which it was continually drawing bills of exchange upon London, it was paying, in the way of interest and commission, upwards of eight per cent. and was consequently losing more than three per cent. upon more than three fourths of all its dealings.
The operations of this bank seem to have produced effects quite opposite to those which were intended by the particular persons who planned and directed it. They seem to have intended to support the spirited undertakings, for as such they considered them, which were at that time carrying on in different parts of the country; and, at the same time, by drawing the whole banking business to themselves, to supplant all the other Scotch banks, particularly those established at Edinburgh, whose backwardness in discounting bills of exchange had given some offence. This bank, no doubt, gave some temporary relief to those projectors, and enabled them to carry on their projects for about two years longer than they could otherwise have done. But it thereby only enabled them to get so much deeper into debt; so that, when ruin came, it fell so much the heavier both upon them and upon their creditors. The operations of this bank, therefore, instead of relieving, in reality aggravated in the long-run the distress which those projectors had brought both upon themselves and upon their country. It would have been much better for themselves, their creditors, and their country, had the greater part of them been obliged to stop two years sooner than they actually did. The temporary relief, however, which this bank afforded to those projectors, proved a real and permanent relief to the other Scotch banks. All the dealers in circulating bills of exchange, which those other banks had become so backward in discounting, had recourse to this new bank, where they were received with open arms. Those other banks, therefore, were enabled to get very easily out of that fatal circle, from which they could not otherwise have disengaged themselves without incurring a considerable loss, and perhaps, too, even some degree of discredit.
In the long-run, therefore, the operations of this bank increased the real distress of the country, which it meant to relieve; and effectually relieved, from a very great distress, those rivals whom it meant to supplant.
At the first setting out of this bank, it was the opinion of some people, that how fast soever its coffers might be emptied, it might easily replenish them, by raising money upon the securities of those to whom it had advanced its paper. Experience, I believe, soon convinced them that this method of raising money was by much too slow to answer their purpose; and that coffers which originally were so ill filled, and which emptied themselves so very fast, could be replenished by no other expedient but the ruinous one of drawing bills upon London, and when they became due, paying them by other draughts on the same place, with accumulated interest and commission. But though they had been able by this method to raise money as fast as they wanted it, yet, instead of making a profit, they must have suffered a loss of every such operation; so that in the long-run they must have ruined themselves as a mercantile company, though perhaps not so soon as by the more expensive practice of drawing and redrawing. They could still have made nothing by the interest of the paper, which, being over and above what the circulation of the country could absorb and employ, returned upon them in order to be exchanged for gold and silver, as fast as they issued it; and for the payment of which they were themselves continually obliged to borrow money. On the contrary, the whole expense of this borrowing, of employing agents to look out for people who had money to lend, of negotiating with those people, and of drawing the proper bond or assignment, must have fallen upon them, and have been so much clear loss upon the balance of their accounts. The project of replenishing their coffers in this manner may be compared to that of a man who had a water-pond from which a stream was continually running out, and into which no stream was continually running, but who proposed to keep it always equally full, by employing a number of people to go continually with buckets to a well at some miles distance, in order to bring water to replenish it.
But though this operation had proved not only practicable, but profitable to the bank, as a mercantile company; yet the country could have derived no benefit front it, but, on the contrary, must have suffered a very considerable loss by it. This operation could not augment, in the smallest degree, the quantity of money to be lent. It could only have erected this bank into a sort of general loan office for the whole country. Those who wanted to borrow must have applied to this bank, instead of applying to the private persons who had lent it their money. But a bank which lends money, perhaps to five hundred different people, the greater part of whom its directors can know very little about, is not likely to be more judicious in the choice of its debtors than a private person who lends out his money among a few people whom he knows, and in whose sober and frugal conduct he thinks he has good reason to confide. The debtors of such a bank as that whose conduct I have been giving some account of were likely, the greater part of them, to be chimerical projectors, the drawers and redrawers of circulating bills of exchange, who would employ the money in extravagant undertakings, which, with all the assistance that could be given them, they would probably never be able to complete, and which, if they should be completed, would never repay the expense which they had really cost, would never afford a fund capable of maintaining a quantity of labour equal to that which had been employed about them. The sober and frugal debtors of private persons, on the contrary, would be more likely to employ the money borrowed in sober undertakings which were proportioned to their capitals, and which, though they might have less of the grand and the marvellous, would have more of the solid and the profitable; which would repay with a large profit whatever had been laid out upon them, and which would thus afford a fund capable of maintaining a much greater quantity of labour than that which had been employed about them. The success of this operation, therefore, without increasing in the smallest degree the capital of the country, would only have transferred a great part of it from prudent and profitable to imprudent and unprofitable undertakings.
That the industry of Scotland languished for want of money to employ it, was the opinion of the famous Mr Law. By establishing a bank of a particular kind, which he seems to have imagined might issue paper to the amount of the whole value of all the lands in the country, he proposed to remedy this want of money. The parliament of Scotland, when he first proposed his project, did not think proper to adopt it. It was afterwards adopted, with some variations, by the Duke of Orleans, at that time regent of France. The idea of the possibility of multiplying paper money to almost any extent was the real foundation of what is called the Mississippi scheme, the most extravagant project, both of banking and stock-jobbing, that perhaps the world ever saw. The different operations of this scheme are explained so fully, so clearly, and with so much order and distinctness, by Mr Du Verney, in his Examination of the Political Reflections upon commerce and finances of Mr Du Tot, that I shall not give any account of them. The principles upon which it was founded are explained by Mr Law himself, in a discourse concerning money and trade, which he published in Scotland when he first proposed his project. The splendid but visionary ideas which are set forth in that and some other works upon the same principles, still continue to make an impression upon many people, and have, perhaps, in part, contributed to that excess of banking, which has of late been complained of, both in Scotland and in other places.
The Bank of England is the greatest bank of circulation in Europe. It was incorporated, in pursuance of an act of parliament, by a charter under the great seal, dated the 27th of July 1694. It at that time advanced to government the sum of £1,200,000 for an annuity of £100,000, or for £ 96,000 a-year, interest at the rate of eight per cent. and £4,000 a-year for the expense of management. The credit of the new government, established by the Revolution, we may believe, must have been very low, when it was obliged to borrow at so high an interest.
In 1697, the bank was allowed to enlarge its capital stock, by an ingraftment of £1,001,171:10s. Its whole capital stock, therefore, amounted at this time to £2,201,171: 10s. This ingraftment is said to have been for the support of public credit. In 1696, tallies had been at forty, and fifty, and sixty, per cent. discount, and bank notes at twenty per cent. {James Postlethwaite’s History of the Public Revenue, p.301.} During the great re-coinage of the silver, which was going on at this time, the bank had thought proper to discontinue the payment of its notes, which necessarily occasioned their discredit.
In pursuance of the 7th Anne, c. 7, the bank advanced and paid into the exchequer the sum of £400,000; making in all the sum of £1,600,000, which it had advanced upon its original annuity of £96,000 interest, and £4,000 for expense of management. In 1708, therefore, the credit of government was as good as that of private persons, since it could borrow at six per cent. interest, the common legal and market rate of those times. In pursuance of the same act, the bank cancelled exchequer bills to the amount of £ 1,775,027: 17s: 10½d. at six per cent. interest, and was at the same time allowed to take in subscriptions for doubling its capital. In 1703, therefore, the capital of the bank amounted to £4,402,343; and it had advanced to government the sum of £3,375,027:17:10½d.
By a call of fifteen per cent. in 1709, there was paid in, and made stock, £ 656,204:1:9d.; and by another of ten per cent. in 1710, £501,448:12:11d. In consequence of those two calls, therefore, the bank capital amounted to £ 5,559,995:14:8d.
Musean translation
Mouseia’s complete machine-assisted Musean translation, made directly from the complete English text of all five books for fidelity, the author’s force and cadence, and modern clarity.
Amid this outcry and distress, a new bank was established in Scotland for the express purpose of relieving the country's distress. The intention was generous, but its execution imprudent; perhaps the nature and causes of the distress it meant to relieve were poorly understood. It was more liberal than any earlier bank both in granting cash accounts and in discounting bills of exchange. In discounting bills, it seems scarcely to have distinguished genuine bills from circulating ones, but discounted them all alike. Its declared principle was to advance, on any reasonable security, all the capital intended for improvements whose returns were slowest and most distant, such as improvements of land. Encouraging such improvements was even said to be the foremost public-spirited purpose for which it was founded. By freely granting cash accounts and discounting bills, it undoubtedly issued great quantities of bank notes. But most of those notes exceeded what the country's circulation could readily absorb and employ, and came back for exchange into gold and silver as quickly as they were issued. Its coffers were never well filled. The capital subscribed to the bank in two separate subscriptions amounted to one hundred and sixty thousand pounds, of which only eighty per cent. was paid up. Payment was to be made in several installments. Many proprietors, when paying their first installment, opened cash accounts with the bank; the directors, believing they must treat their own proprietors as liberally as everyone else, let many borrow on these accounts what they paid in for all their later installments. These payments thus merely put into one coffer what had just been taken from another. But however full the bank's coffers might have been, its excessive circulation would have emptied them faster than any method could replenish them except the ruinous one of drawing bills on London and, when they matured, paying them, with interest and commission, by drawing another bill on the same place. With its coffers so poorly filled, it is said to have resorted to this measure within a very few months of opening for business. The proprietors' estates were worth several millions and, under their subscription to the bank's original bond or contract, were truly pledged as security for all its obligations. The great credit this substantial pledge necessarily gave the bank enabled it, despite its excessive liberality, to operate for more than two years. When forced to stop, it had about two hundred thousand pounds in bank notes circulating. To sustain the circulation of notes that returned as fast as they were issued, it had continually drawn bills of exchange on London, growing steadily in number and value until, when it stopped, they amounted to upwards of six hundred thousand pounds. In a little more than two years, then, the bank had advanced upwards of eight hundred thousand pounds to various people at five per cent. On the two hundred thousand pounds circulating as bank notes, the five per cent. could perhaps count as clear gain, apart from management costs. But on the upwards of six hundred thousand pounds for which it was continually drawing bills on London, it paid upwards of eight per cent. in interest and commission. It therefore lost more than three per cent. on more than three fourths of its entire business.
The bank's operations seem to have produced effects precisely opposite to those its planners and directors intended. They apparently hoped to sustain what they regarded as bold enterprises then underway across the country, while taking over the whole banking business and displacing the other Scotch banks, especially those in Edinburgh, whose reluctance to discount bills had caused offense. The bank certainly gave the projectors temporary relief, allowing them to continue their projects about two years longer than they otherwise could. But it merely allowed them to sink that much deeper into debt, making their eventual ruin that much heavier for them and their creditors. Far from alleviating the distress the projectors had brought on themselves and their country, the bank's operations actually made it worse in the long run. Most would have fared much better, as would their creditors and their country, if forced to stop two years earlier than they did. Yet the temporary relief the bank gave these projectors provided real and lasting relief to the other Scotch banks. Everyone dealing in circulating bills of exchange that those banks had become reluctant to discount turned to the new bank, which welcomed them with open arms. The other banks could therefore easily escape a fatal circle from which they otherwise could not have withdrawn without considerable loss, and perhaps even some damage to their credit.
In the long run, then, this bank's operations increased the country's real distress, which it intended to relieve, and effectively delivered its rivals, whom it meant to displace, from very great distress.
When the bank first began, some believed that, however quickly its coffers emptied, it could easily refill them by raising money on the securities of those to whom it had advanced paper. Experience soon convinced them, I believe, that this means of raising money was far too slow for the purpose. Coffers so ill filled at the outset and emptied so quickly could be replenished only through the ruinous expedient of drawing bills on London, and paying each on maturity by another draft on London with accumulated interest and commission. Even if they could have raised money on securities as quickly as they needed, however, each transaction would have brought them a loss rather than a profit. In the long run they would have ruined themselves as a commercial company, though perhaps not as soon as by the more costly practice of drawing and redrawing. They could still have earned nothing from interest on the paper, which exceeded what the country's circulation could absorb and employ and returned for exchange into gold and silver as fast as they issued it. To make those payments, they themselves had continually to borrow money. Meanwhile, the full expense of borrowing—employing agents to find lenders, negotiating with them, and drawing up the necessary bond or assignment—would have fallen on the bank as an outright loss in its accounts. A plan to replenish its coffers this way resembles that of a man whose pond has a stream continually running out but none continually running in, and who proposes to keep it equally full by sending a number of people back and forth with buckets to a well miles away.
Even if this operation had proved not only practicable but profitable for the bank as a commercial company, the country would have gained nothing from it and, on the contrary, would have suffered considerable loss. It could not have increased the amount of money available to lend in the slightest; it could only have made the bank a kind of general loan office for the whole country. Borrowers would have approached the bank instead of the private individuals who lent their money to it. But a bank lending to perhaps five hundred people, most of whom its directors can know very little about, is unlikely to choose its debtors more wisely than a private individual lending to a few people he knows and whose sober and frugal conduct he has reason to trust. Most debtors of a bank such as the one I have described would likely be fanciful projectors, drawers and redrawers of circulating bills. They would spend the money on extravagant enterprises they probably could never complete, despite all assistance, and which, even if completed, would never repay their actual cost or provide a fund capable of supporting as much labor as went into them. The sober and frugal debtors of private individuals, by contrast, would be likelier to employ borrowed money in sensible enterprises suited to their capitals. Such ventures might have less grandeur and wonder, but more substance and profit: they would repay their costs with ample profit and thus provide a fund capable of supporting much more labor than was spent on them. The success of this operation, then, would not increase the country's capital in the slightest. It would only shift a large part of it from prudent, profitable enterprises to imprudent, unprofitable ones.
The famous Mr Law believed that Scotland's industry languished for lack of money to employ it. He proposed to remedy the shortage by establishing a special kind of bank, which he apparently imagined could issue paper to the full value of all the land in the country. Scotland's parliament did not see fit to adopt the project when he first proposed it. With some changes, it was later adopted by the Duke of Orleans, then regent of France. The belief that paper money could be multiplied almost without limit was the true foundation of the so-called Mississippi scheme, perhaps the most extravagant project in banking and stock-jobbing the world has ever seen. Mr Du Verney explains its various operations so fully, clearly, and methodically in his Examination of the Political Reflections upon commerce and finances of Mr Du Tot that I shall give no account of them. Mr Law himself explains its principles in a discourse on money and trade published in Scotland when he first put forward his project. The splendid yet visionary notions presented there and in some other works founded on the same principles still impress many people, and have perhaps contributed in part to the excessive banking lately complained of in Scotland and elsewhere.
The Bank of England is Europe's greatest bank of circulation. Pursuant to an act of parliament, it was incorporated by a charter under the great seal dated the 27th of July 1694. At that time it advanced the government £1,200,000 in return for an annuity of £100,000: £ 96,000 a-year in interest at eight per cent., and £4,000 a-year for management costs. The credit of the new government established by the Revolution must, we may suppose, have been very low when it had to borrow at such a high rate of interest.
In 1697, the bank was permitted to increase its capital stock by an ingraftment of £1,001,171:10s. Its total capital stock thus stood at £2,201,171: 10s. This ingraftment is said to have supported public credit. In 1696, tallies had traded at discounts of forty, fifty, and sixty per cent., and bank notes at twenty per cent. [James Postlethwaite’s History of the Public Revenue, p.301.] During the great recoinage of silver then underway, the bank had seen fit to suspend payment on its notes, inevitably damaging their credit.
Pursuant to the 7th Anne, c. 7, the bank advanced and paid into the exchequer £400,000, bringing its total advance against its original annuity of £96,000 in interest and £4,000 for management costs to £1,600,000. By 1708, therefore, government credit was as good as private credit, since it could borrow at six per cent. interest, the ordinary legal and market rate of the time. Under the same act, the bank canceled exchequer bills amounting to £ 1,775,027: 17s: 10½d. at six per cent. interest, and was at the same time allowed to accept subscriptions to double its capital. In 1703, therefore, the bank's capital amounted to £4,402,343, and it had advanced £3,375,027:17:10½d. to the government.
A call of fifteen per cent. in 1709 brought in £ 656,204:1:9d., which was made stock; another call of ten per cent. in 1710 brought in £501,448:12:11d. After these two calls, therefore, the bank's capital stood at £ 5,559,995:14:8d.
Plain English translation
Mouseia’s complete Plain English edition, made independently and directly from the complete English text of all five books.
Amid this outcry and distress, a new bank was established in Scotland expressly to relieve the country's distress. Its aim was generous, but it was run unwisely. Perhaps its founders did not understand the nature or causes of the distress they meant to relieve. This bank was more generous than any earlier bank in offering cash accounts and discounting bills of exchange. It seems hardly to have distinguished genuine bills from circulating bills, discounting both alike. Its stated policy was to advance, against any reasonable security, all the capital needed for improvements that paid back most slowly and distantly, such as land improvements. Supporting these improvements was even said to be the main public-spirited reason for founding it. By generously offering cash accounts and discounting bills, it certainly issued a great many bank notes. Most of those notes, however, exceeded what the country could readily take up and use. As quickly as the bank issued them, they returned to be exchanged for gold and silver. Its vaults were never well supplied. At two different subscription rounds, investors pledged a total of one hundred and sixty thousand pounds in capital, but paid in only eighty per cent. of it. The money was to be paid in several installments. When many shareholders paid their first installment, they also opened cash accounts with the bank. The directors thought they should treat shareholders as generously as everyone else, so they allowed many to borrow through those accounts what they paid toward every later installment. These payments therefore merely moved money into one vault that had just been taken out of another. Even if the bank's vaults had been full, its excessive note circulation would have emptied them faster than they could be refilled except by the ruinous device of drawing bills on London and, when those bills fell due, paying them with new bills drawn there, plus interest and commission. Since its vaults were so poorly supplied, it is said to have resorted to this device within a few months of opening. Its shareholders' estates were worth several millions, and their subscriptions to the bank's original bond or contract actually pledged those estates to cover all its obligations. This substantial guarantee gave the bank enough credit to operate for more than two years despite its excessive generosity. When it had to stop, it had about two hundred thousand pounds in bank notes circulating. To support these notes, which came back for redemption as fast as it issued them, it had constantly drawn bills on London. Their number and value kept rising and amounted to upwards of six hundred thousand pounds when it stopped. In little more than two years, then, the bank had advanced upwards of eight hundred thousand pounds to various people at five per cent. On the two hundred thousand pounds of notes it circulated, that five per cent. might have been a clear gain, apart from management costs. But on the upwards of six hundred thousand pounds for which it kept drawing bills on London, it paid upwards of eight per cent. in interest and commission. So it lost more than three per cent. on more than three fourths of all its business.
This bank seems to have produced exactly the opposite of the results its founders and directors wanted. They meant to support what they considered bold projects then under way across the country. They also meant to take all banking business for themselves, pushing out the other Scotch banks, especially those in Edinburgh, whose reluctance to discount bills had caused offense. The new bank did temporarily relieve some promoters, allowing their projects to continue for about two years longer than they otherwise could have. But this only let them sink deeper into debt. When ruin came, the blow was heavier for them and their creditors. In the long run, instead of easing the distress these promoters had brought on themselves and their country, the bank made it worse. It would have been much better for them, their creditors, and their country if most had been forced to stop two years earlier than they did. The temporary help this bank gave the promoters, however, was real and lasting help for the other Scotch banks. People trading in circulating bills, which those banks had grown reluctant to discount, went to the new bank and were welcomed. The other banks could then escape easily from the dangerous circle, which they could not otherwise have left without a considerable loss, and perhaps some damage to their credit as well.
Thus, in the long run, the bank's operations increased the country's real distress, which it had meant to relieve, and effectively relieved its rivals of great distress, though it had meant to replace them.
When the bank first opened, some people thought it could easily refill its vaults, however quickly they emptied, by borrowing against the securities of those to whom it had issued paper. Experience, I believe, soon showed that this way of raising money was far too slow. Vaults so poorly stocked at first and emptied so quickly could be refilled only through the ruinous device of drawing bills on London and paying them when due with new bills drawn on London, with interest and commission added. But even if the bank could have raised money as fast as it needed in the proposed way, it would have lost money on every transaction rather than made a profit. In the long run it would have ruined itself as a commercial company, though perhaps less quickly than by the more expensive practice of drawing and redrawing. It could still have earned nothing from interest on the paper. The paper exceeded what the country's circulation could use, so it came back to be exchanged for gold and silver as soon as it was issued. The bank itself continually had to borrow money to make these payments. All the borrowing costs would instead have fallen on the bank as a clear loss on its accounts: paying agents to find lenders, negotiating with them, and preparing the necessary bond or assignment. Refilling its vaults that way would be like trying to keep a pond full when a stream constantly runs out and none runs in. The pond's owner proposes to employ people to carry buckets of water continually from a well several miles away.
Even if this operation had been possible and profitable for the bank as a commercial company, it would have brought the country no benefit and instead caused a substantial loss. It could not have increased the available amount of money to lend at all. It would only have turned the bank into a sort of central loan office for the whole country. Borrowers would have applied to the bank instead of to the private people who had lent their money to it. But a bank lending to perhaps five hundred people, most of whom its directors know very little about, is unlikely to choose borrowers more wisely than a private person lending to a few people he knows and trusts to act soberly and frugally. Most borrowers from a bank like the one I have described would probably be unrealistic promoters, drawing and redrawing circulating bills. They would spend on extravagant projects that they probably could not finish even with all the help available. Even if completed, these projects would never repay their real costs or provide funds to support as many workers as had worked on them. The sober, frugal borrowers of private lenders, on the other hand, would more likely spend the money on sensible projects suited to their capital. Those projects might be less grand and astonishing, but they would be sounder and more profitable. They would repay what was spent on them with a large profit and provide funds to support many more workers than had worked on them. So even if this operation had succeeded, it would not have increased the country's capital at all. It would merely have moved much of that capital from careful, profitable projects to reckless, unprofitable ones.
The famous Mr Law believed that Scotland's industry was held back by a lack of money to put it to work. He proposed to remedy this by establishing a special kind of bank that, he seems to have thought, could issue paper money equal to the full value of all the country's land. The parliament of Scotland did not accept his proposal when he first made it. The Duke of Orleans, then regent of France, later adopted it with some changes. The belief that paper money could be multiplied almost without limit was the real basis of the so-called Mississippi scheme, perhaps the most extravagant banking and stock-trading project the world has ever seen. Mr Du Verney explains its various operations so thoroughly, clearly, and systematically in his Examination of the Political Reflections upon commerce and finances of Mr Du Tot that I will not describe them. Mr Law himself explains its underlying principles in a discourse on money and trade that he published in Scotland when first proposing his plan. The dazzling but imaginary ideas in that work and other writings based on the same principles still impress many people. Perhaps they have partly contributed to the excessive banking recently complained of in Scotland and elsewhere.
The Bank of England is Europe's largest bank that issues circulating notes. It was incorporated by a charter under the great seal, dated the 27th of July 1694, under an act of parliament. At that time it advanced £1,200,000 to the government in return for an annuity of £100,000: £ 96,000 a-year in interest at eight per cent., and £4,000 a-year for management expenses. We can assume that the new government's credit after the Revolution was very low, since it had to borrow at such a high interest rate.
In 1697, the bank was allowed to add £1,001,171:10s. to its capital stock through a new subscription. Its total capital stock then came to £2,201,171: 10s. The addition is said to have been made to support public credit. In 1696, government tallies had traded at discounts of forty, fifty, and sixty per cent., and bank notes at twenty per cent. [James Postlethwaite’s History of the Public Revenue, p.301.] During the great re-coinage of silver then under way, the bank had stopped paying out on its notes, which inevitably damaged their credit.
Under the 7th Anne, c. 7, the bank advanced and paid £400,000 into the exchequer. This brought its advances on its original annuity to £1,600,000, in return for £96,000 interest and £4,000 for management expenses. By 1708, then, the government's credit was as good as a private person's: it could borrow at six per cent. interest, the usual legal and market rate at the time. Under the same act, the bank canceled exchequer bills totaling £ 1,775,027: 17s: 10½d. at six per cent. interest and was permitted to take subscriptions to double its capital. In 1703, therefore, the bank's capital amounted to £4,402,343, and it had advanced £3,375,027:17:10½d. to the government.
A call of fifteen per cent. in 1709 brought in £ 656,204:1:9d., which became stock. Another call of ten per cent. in 1710 brought in £501,448:12:11d. After these two calls, the bank's capital amounted to £ 5,559,995:14:8d.