The national Bank of London is composed of a large number of shareholders
who elect a board of directors to govern its operations. Their main task
consisted in making a yearly distribution of the profits from interest on the
money lent against the bank deposits. Later, the public debt was incorporated
with it, on which the state pays interest annually.
In spite of such a solid foundation, once 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 took place, and holders of notes went in
crowds to withdraw money. The same thing happened during the collapse of the
South Sea Company in 1720.
The refinements introduced to support the bank and limit its discredit
were first to set up a number of clerks to count out the money to those
bringing in notes, to pay out large amounts in sixpences and shillings to
gain time,[1] and to pay some portion
to individual holders who had been waiting all day to be paid.
However, the most considerable sums were paid to friends who took them
away and secretly brought them back to the bank only to repeat the same
maneuver the next day. In this way, the bank saved its appearance and gained
time until the panic abated. But when this did not suffice, the bank opened a
stock subscription, engaging trusty and solvent people to join as guarantors
of large amounts, in order 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 wealthy and powerful people were on the subscription list, the run
on the bank ceased and deposits were brought in as usual.
If a Minister of State in England,[2]
seeking to lower the interest rate, or for other reasons, increases the price
of public stock in London, and if he has enough credit with the directors of
the bank to get them to issue a quantity of banknotes without backing (under
the obligation of indemnifying them in case of loss), begging them to use
these notes to buy several blocks of shares of public stock, this stock's
price will increase due to these operations.
And those who have sold stock, seeing that high prices continue, will
perhaps decide to buy it back at a higher price than they sold it for, so as
not to leave their banknotes idle, believing rumors that the interest rate
will fall and that the stock's price will rise further. If several people
imitate the agents of the banks and buy this stock, hoping to profit like
them, the public funds will increase in price to the point that the minister
wishes. And it may be that the bank will cleverly resell at a higher price
all the stock 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 that were issued.
If the bank alone makes the price of public stock rise by buying it, it
will make it fall when it sells it in order to cancel its extraordinary
notes. However, many individuals usually follow the agents of the bank in
their operations and contribute in keeping the price high. Some of them get
caught because they do not understand these operations, in which are found
infinite refinements or rather trickery, which lie outside my subject.
It is then evident that a bank, with the complicity of a public
administrator, 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
administrator. When the steps are taken discreetly, this can pay off the
state's 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 they are used for the buying and selling of stock. They
are not used for household expenses and are not exchanged into silver. But if
some panic or unforeseen crisis drove note holders to demand silver from the
bank, the bomb would burst and it would be seen that these are dangerous
operations.
