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CHAPTER I.

WHAT THE ENGLISH KNEW ABOUT BANKING—1600-1650.

In 1740, an experiment was started in the province of the Massachusetts Bay, the purpose of which was to furnish the province with a circulating medium, resting for its security upon mortgages of real estate. The details of this attempt are of interest to the historian and to the economist, although they are robbed of much of their value through the untimely closure of the Land Bank in consequence of parliamentary legislation.

The idea upon which this bank was based, was one which had been handed down from the previous century. The premature closure of the affair prevented a complete demonstration of the economic heresies upon which it was founded. Hence the story of its career has been neglected by historians, and the influence that it might have exerted upon financiers has been lost. Propositions to make use of real estate as a basis for credit in the establishment of a bank were frequently discussed in England, even before the difference between a bill of exchange and a promissory note had established itself in the minds of the lawyers of the realm. The underlying theory of many of these early propositions for land banks differed, therefore, from that which was developed in the experiment in 1740. The lesson which had been learned in England from the continental banks in the first half of the seventeenth century, was that if the degraded coin then in circulation should be deposited in a bank and an equivalent credit, in terms of standard coin, be given depositors, such credits could be made use of in the adjustment of debts by transfers of account at

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the bank. The idea of making a bank thus act as a clearing house for the nation, through the deposit in its vaults of all the current coin and its conversion into bank credits, soon led to propositions to comprehend goods and merchandize with coin, in the establishment of bank credits. This was naturally followed by the argument that land, being stable and imperishable, was even better for the purpose than coin or goods. The bank deposit was regarded by some of these writers as permanent and capable of use only at the bank through transfers of account. It was soon seen, however, that bank credits might be made available elsewhere than at the counter of the bank, in the same way as is done today through the check, and this necessarily destroyed the idea of the deposit being permanent. By the middle of the century some of the schemers began to suggest the establishment of land banks which should emit bills. The idea of using the credit based upon lands as a foundation for a bank of emission, was not universally adopted by the advocates of what were termed land banks, and those who care to investigate the details of the land banks proposed during the last half of the century, will find that while many favored the idea of thus extending the use of the credit which the bank could gain through mortgages of real estate, others still clung to the idea of the individual bank credit with the limited function which originally attached to it. The discussion practically culminated in England in the foundation of the Bank of England in 1694; in the establishment of a Land Bank in 1695, and in the incorporation of the National Land Bank by parliament in 1696. So far as can be ascertained, neither of these land banks entered upon the actual transaction of business.

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The nearest approach in recent times to anything resembling a land bank, is to be found in some of our investment companies. Certain of these companies loaned money freely upon western lands and then sold to investors the interest-bearing bonds of the company, the security for the same being nominally based upon the mortgages given to the company. It was soon realized that the purchaser of such an investment bond could only depend upon the solvency of the company for the return of his purchase money, there being no direct connection between the bond which he held and any particular mortgage given to the company, against which such bond might be claimed to have been issued. The situation of the owner was in this respect similar to that of the possessor of a bill emitted by our Land Bank in 1740.

Our railway mortgage securities furnish another instance of modern investment bonds, in which some of the more glaring defects of the mortgages of the investment companies are obviated. These mortgages which generally rest, in part at least, upon real estate, run to trustees who hold the title for the benefit of the holders of a designated set of bonds. These bonds are uniform in amount and can, of course, be sub-divided at the will of the railway company at any time prior to emission. They are, however, intended for investment and not for circulation, being dependent for their value upon the security behind them, and the rate of interest which they bear, and being payable only at a future day.

The intervention of trustees in railway mortgages seems to have suggested a method by means of which the difficulty in protecting the bondholder, which was disclosed in connection with the investment companies

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above alluded to, could be overcome. This was accomplished in a new class of companies by means of a device, which originated in Germany, whereby the investment company itself acts as a trustee, and issues its interest-bearing certificates, co-terminous with the mortgages upon which they are based, setting forth that the holder is entitled to a specific interest in a given mortgage. These can obviously be sub-divided at the will of the company, but like the bonds of the railway, they are in the character of investments and are not adapted to circulation. They are payable at a future day and bear interest. They furnish, however, the nearest approach to a circulating medium, based upon real estate, which is to be found in use amongst our financiers to-day.

The success of the Bank of England crushed the hopes of those who were striving to establish land banks, whether it was their purpose to make use of the mortgaged real estate as a basis for “current credit” or to emit a corresponding amount of bills for circulation. It was left for the experiment to be made in the latter form in the colonies many years later. It is obvious that both the founders of the Bank of England and their rivals who sought to establish land banks, were stimulated in their efforts by an acknowledged need of the nation. It has, indeed, always been a matter of surprise that England did not earlier profit by the examples of the several banks which had been established upon the continent long before she made any effort in the same direction. It would seem as if the success of these institutions, their power and influence, and the stimulus that they gave to commerce wherever they were organized, ought to have furnished a lesson which would have compelled the establishment of a bank in London at a much earlier date than that of the incorporation of the

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Bank of England. The manifest difficulties of handling the affairs of the several companies of exploration and mercantile adventure in distant countries, of which the East India Company is a representative, in a community absolutely devoid of banking facilities, are obvious. The existence of the companies is in itself proof that the commercial spirit of the country was aroused and that it was of the utmost consequence that the capital of the kingdom should be utilized in the best manner then known to financiers.¹ Notwithstanding this, we find that during the first half of the seventeenth century, there was but little attention given to the subject. Occasionally some person of more than ordinary intelligence urged that advantage should be taken of the examples set by the continental cities in which banks had been founded, but the average allusions indicate that but little knowledge prevailed upon the subject, and, if we may judge from the names, many of these came from foreigners.

As early as 1581, a device for the establishment of a bank in England was submitted to the Queen and Council.² The proposition would seem to have been to found an office, into which, it was claimed, money

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would come without expense, which would furnish the government any needful sum, and through which usury could be stopped. There is no hint how all of this was to be accomplished; but it suggests, at least, a bank of deposit which should have power to lend the funds placed in its custody.

The next proposition of which we find record was made to the council in May 1622,¹ by Sir Robert Heath. His underlying idea was that all payments in trade over £20 in amount, should be made at a designated place. He alleged that the establishment of a bank similar to the then existing banks upon the continent would prevent the exportation of coin. It was his opinion that if the King should issue an order that all payments of money should be made at a certain place, it would have the same effect.

If this scheme had been carried out, it might, perhaps, have produced by compulsion, a result similar in effect to that which resulted from the voluntary use of the Bank of Amsterdam by the merchants of that city. There, coin was deposited and in return therefor a permanent credit was given in the bank. This credit was transferable and being of definite amount was preferable for the adjustment of debts in Amsterdam, to the clipped and short weight coin in circulation. It is probable that Sir Robert thought that by the establishment of such a clearing house for the settlement of debts, the coin of the kingdom would be collected in a single place and the adjustment of debts would be effected by means of credits through this clearing house or bank. The details of his scheme and his reasons for thinking that such a proceeding would prevent the

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exportation of coin, do not appear, and we can only conjecture that this was his opinion from an analysis of his statements.

Malynes, in his Lex Mercatoria,¹ gives a crude account of the manner in which banks were established in those days. The bank which he describes is simply a deposit bank, but differs from the Bank of Amsterdam in its later days, in that the deposits could be at any time withdrawn. He fully appreciated the power of banks, and states that they would become the cashiers of the province, city, or commonwealth where they were established. “A banke,” he says, “is properly a collection of all the ready money of some kingdom, commonwealth or province, as also of a particular city or town, into the hands of some persons licensed and established thereunto by publick authority of some King, Prince, or Commonwealth, erected with great solemnity in the view of all the people and inhabitants of that city, or Commonwealth or Kingdome, with an intimation thereof made divers times, to be upon such a day in the open market place, where a scaffold is purposely erected, with an ostentation of great store of money of gold and silver, supposed to belong to those persons or bankers so established; which is unto them an attractive power to perswade and allure the common people to bring their monies into these Bankers hands, where at all times they may command it, and have it againe at their owne pleasure, with allowing them only a small matter of five upon every thousand ducats or crowns, when any man will retire or draw his money into his own hands againe;

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which although it be but in 20 years yet during all that time they are to have no more; so that these persons or Bankers do become as it were the generall servants or cashiers of that Province, City, or Commonwealth.” “The City of Amsterdam,” he adds, “have in the yeare 1608 also erected a very great bank, for the which the said city hath undertaken to answer, whereby they are alwaies stored with mony, as appeareth, that the same is plentifully to be had at interest, at six and seven in the hundred by the yeare, and some at five and under. This custom is now so settled that it is as effectual as any law.”

It may be inferred from the general account that Malynes gives of a bank deposit, and from what he specifically says of the Bank of Amsterdam, that he conceived the deposits of the Bank of Amsterdam to be subject to demand, and that the bank was accustomed to lend money. If loans were made by the bank, they were not openly effected. Bank credits could always be purchased upon the Dam, and it has been supposed that by these sales the bank regulated their price and supplied the needs of the community for some medium of exchange.

In 1627, a suggestion was made that a National Bank should be established, the capital of which should be raised by taxation.¹ It was proposed that this capital should be lent at five per cent., and the objects that could be gained by this were said to be that it would enable merchants to traffic, gentlemen, yeomen and husbandmen to till their grounds, and artificers to work and trade.

In 1636, Philip Burlamachi informed Secretary

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Windebank what he thought of proposing to the King on the erection of a bank for the payment of all large sums which should be negotiated.¹ This mere hint of the proposed plan brings to mind the proposition made fourteen years before by Sir Robert Heath.

The Bank of Venice could not have exerted so much influence upon the financiers of England at that time as did the Bank of Amsterdam. Its example was not, however, entirely overlooked by writers who devoted themselves to the topic of commerce. In 1638, Lewes Roberts, in his Map of Commerce, referred to the extraordinary premium which credits in that bank are said to have obtained over the clipped and sweated coin then in use.² His language was as follows: “These wise Senators fearing to loose what they cannot keepe, I meane, that little trade they yet hold, in comparison of what they had lost by their providence and circumspection, set a distinction between the Monies payable for commodities, which they terme their currant Monies and out of banco, and betweene their Monies paid by Bills of Exchange, which they term in banco * * * the difference now at this time holds in proportion between 20 and 21 per cent.”

The statement that bank credits at Venice were rated at one time at twenty per cent. premium over the coin then current, is repeated by many authors. If no other cause existed for this than the condition of the coin then

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in circulation, the premium was a strong argument in favor of an English bank.¹

In 1641, Henry Robinson issued a pamphlet in which he suggested certain improvements in the administration of affairs.² One of these was “the erecting of a Banke or Grand Cash on such foundation and securitie, as all men may thinke their monies more sure there than in their houses, whereby they may be induc’d to bring them in, and receive a certaine moderate interest of about 5 per 100 or keep them there, till they shall have occasion to dispose of them, or pay them to another, without any reall assuring of monies. * * Thus a Banke is no more than a Grand Cash-Keeper of this whole Kingdome * * .” He referred to the example of Tuscany where people deposited in the Florentine bank, which was by them called Monte de Pieta, where depositors had five per cent. interest per annum, and might draw out the principal at pleasure.

Robinson was working upon the plan of concentrating all the coin of the kingdom in the coffers of an institution which should by means of transfers of accounts adjust debts between depositors without the

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actual use of coin. His bank, however, was to make its appeal for patronage through the security which it offered and the interest which it would allow on deposits. Although the proposed rate was high, it must be remembered that borrowers were obliged to pay more for the use of money then than can be secured by lenders to-day.

In 1649, Peter Chamberlen¹ issued a pamphlet in which he set forth the merits of a bank as a panacea for existing evils.²

The writer saw in the unemployed poor a source of danger to the country. The soldiers of the parliamentary army added to this danger and some provision should be made for their employment. This he would accomplish by the cultivation of lands, the title to which was of a public or quasi public character. All that remained of the property of the church; all common and public lands should be turned over to a company, not with the idea that they should be sold but solely that they should be cultivated. The same company should be appointed to collect and receive all debts due to the government and should become the depository of the parish collections and tithes. The possession and use of these lands and the functions

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above set forth in connection with the collection of government debts and taxes, would furnish he said “the most firm and visible Basis for a Bank in Europe.” It would “cause a great quicknesse of Trade,” and would furnish “a great plenty of money, so as in 3 or 4 years to bring money to 3 per cent.” It would “settle peace in the land, and take off the occasion and expences of the Army.” It would “invite forraine Nations to secure their money here rather than Amsterdam or Venice.”

How this company was to be formed, and what security they were to give for the judicious management of the vast powers to be lodged in their hands is not clearly set forth. The style of the author is rambling and incoherent, and he evidently did not feel called upon to develop a practical working scheme for his bank. It was enough for him to show that certain dangers could be avoided if his plans were adopted and that thereby certain advantages would accrue.

“The benefit,” he says, “of a public Banck which hath this advantage of all other Bancks in Holland, Italy, or elsewhere as to have what they have, i. e. the Public Faith of the place, and such a sufficient and Royall Stock, as none of them can boast of, in the least manner. This we will not at present estimate, only the present help of paying of the interest, that is at 6 per cent., and bringing it to 3 per cent. It being probable that all Nations will rather desire their security out of this Bank then others, by reason of the Lands.”

“Yet the public banck of Amsterdam hath so much credit, as to have allowance for the bare keeping of the principall entire, if the information of the place be

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true; which all passeth from one to another in paper, allowing great Rates for Exchange.”

The scheme, it will be seen, was an enlargement of Robinson’s proposal, and the association of land as the basis of credit was a step towards the next stage in public opinion, namely that land was the best security that could be offered as a foundation for public credit.

In 1650, William Potter, of London, published a folio volume entitled “The Key of Wealth”. The quaint title-page of this volume gives a complete analysis of its contents and is a curiosity among title pages.¹

The same year that the “Key of Wealth” came out, Potter also published another volume upon the same subject. The second publication was in quarto form and was entitled “The Tradesman’s Jewell”.²

A comparison of the titles of these two volumes will show that the latter contains the substance of the former. The author was seeking to demonstrate how trade could be stimulated and wealth increased by means of paper money. This is clearly set forth in the title of the “Tradesman’s Jewell” and may be discovered underneath the verbose phraseology of the redundant title of the “Key of Wealth”. It is, indeed,

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stated in the preface to the “Tradesman’s Jewell” for the information of the judicious reader that this volume was an “abbreviate” of the “Key of Wealth”.

These two volumes were speedily followed by a third which was in the form of certain proposals addressed to the Council of Trade, the purpose of which was to forward the project set forth in the “Key of Wealth”.¹

The basis of Potter’s plan was the proposition that an increase of the circulating medium would increase trade without increasing prices.² He claimed that the exchange of personal credits, if they were well founded and freely accepted, would increase trade, and this doctrine he epitomized in the following statement: “If you can furnish credits which will circulate, you have a good circulating medium.”

The method by which he proposed to secure the circulation of these credits was that several tradesmen should cause a number of bills to be printed, the face value of which having been determined, they should lend them to each other, demanding the same security as if they were so much ready money. Borrowers were to stand bound with the rest of the company, to accept

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half bills and half money in trade and to make payment of the bills in money if demanded. Provision was also to be made for the maintenance of an office where the bills should be redeemed within six months.

It was his idea that those who dealt in lands would of necessity join in the enterprise, and the increase in the value of their estates caused by the greater facilities for transactions, would in turn enable them to borrow more money upon their properties. This “perpetual doubling,” he said, “would in forty years make an estate of £1000 worth five hundred millions and the nation would then be worth (the world affording but commodity enough for the money) five hundred thousand times more than they now are,” and he added by way of illustration, that it would cause “he who is now worth but twenty shillings to be worth five hundred thousand pounds, and so of others proportionately.”

The extravagant hopes of Potter were mingled with and, perhaps caused by his partial and imperfect conceptions of certain economic truths. An increase of the circulating medium would produce greater activity in trade. In spite of this activity, prices of commodities would not be raised, yet real estate would advance in a fabulous manner. We, in these days of the development of manufactures, have seen a similar state of things. Prices of living have actually gone down during a period of business activity, while real estate, especially where men congregate in large bodies, has advanced with wonderful strides, but we have also seen that wherever the circulating medium was unduly increased, prices of commodities when measured in the inflated medium, have advanced. If Potter’s propositions had been based upon truths and his prophecies

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had been likely to be realized, there would have been no need that one “should be in a way of trading” in order “to multiply his returns”. All that it would have been necessary for him to do was to sell out his personal property the price of which was not going to be affected favorably and put all the returns into real estate, the perpetual doubling of which could not have failed to satisfy the most ambitious speculator, however wild his dreams.

Notwithstanding the absurdities and incongruities of Potter’s books, and the uncouth and awkward style in which they were written, these publications obtained more or less notoriety in their day and their influence can be traced, not only in England but in the colonies.

A criticism of the plan suggested by Potter was printed about 1653. Its authorship is attributed to Samuel Hartlib. In this essay the inconveniences of gold and silver when used as a circulating medium are set forth. For the purpose of obviating these, “arose the admirable Invention of a Bank; which (in short) is no other thing than a transmitting of the ownership of money, (deposited in a Publique Treasury, and secured (there) by Publique Authority) from hand to hand, by assignation onely; without the danger and trouble of keeping, carrying, or telling it.”¹

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Such a bank, the writer says, is, however, only a partial remedy for existing inconveniences. It will be used only by merchants and not ordinarily by others. It does not furnish a new medium of commerce but only increases the use of gold and silver and of this he disapproves, “since the having of more credit, to be currant in a Bank, than there is money to answer it, is no better than a publique cheat.”

Having thus expressed his views upon the multiplication of the use of coin through the agency of a deposit bank, the author goes on to say that some new medium is needed which shall have value within the borders of the state but which shall not be controllable by foreign powers; which shall be capable of extension to ten times the money owned by the nation; which may be managed without danger and transmitted with ease and security; which will not be buried in foreign banks but will remain in circulation.

He then proceeds to define the methods of the continental banks. The fact that all accounts in bank are converted into the currency of the realm is indicated, although not stated in that exact form, in the following: “One species of money (such as Authority points) is brought into a Bank, or Publique Treasury”. Knowing as we do, that one purpose of the account in bank, was to secure in terms of the local currency, a valuation for foreign coinage of variable condition, it may be inferred that it was not the intention of the author to say that deposits in the currency of the realm were brought into the continental banks, but rather that whatever money was there deposited was credited in terms of that currency. The credit thus established is defined as follows: “The money thus deposited (instead

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of being taken out, carried and delivered) passed (from person to person) by assignation onely of the ownership of so much money; which (in the language of the place) is called Credit in Bank or Bank Credit.” It was a part of the author’s scheme that payments by creditors at the bank should be compulsory, the operation of which he explains in the following terms: Since “all payments of Bills of Exchange must (by a law established) be made at the Bank, it (from thence) comes to pass, that the owners of the money in Bank (though they may) do yet seldome or never take out their money, but make their payments by assignation onely of their Credit in Bank, which goes (in a Continental suit) from hand to hand, with seldome or never taking the money out of Bank.”

It would seem, therefore, that the author relied upon the advantages furnished by the bank credit to maintain the deposits of the bank. He did not propose that the bank should retain possession of the money of the depositor beyond the time when the depositor desired it to do so.

For the maintenance of such banks as these, it was thought that two laws would be necessary: I. That all payments above twenty or thirty pounds should be made at the bank; II. That all payments should be made in “one species of coin”.

In the statement of the second required law we meet with the same trouble that was encountered in the definition of a continental bank. It will be seen later, however, that the author did not propose to base any credits on deposits of coin, but limited them to mortgages. He must, therefore, have meant that all credits should be given in one species of coin, there being no payments of money to the bank and payments by the bank being made by transfers of account.

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One difficulty in the way of requiring all creditors to adjust their indebtedness through the agency of Bank Credits must have been evident to each person who had suggested the establishment of a bank for this purpose. Residents in London might, perhaps, have submitted to a law compelling them to make use of a government institution of this sort located within easy reach of their places of business. It is obvious, however, that it would have been impracticable for those who resided at a distance from London to comply at all times with such a requisition if there were but one bank office and that located in the city. The writer of this pamphlet recognized this difficulty and he proposed that as many such banks as should be needed should be set up by authority. This done, he would require all payments to be made in bank credits. These credits he proposed to establish through mortgages of lands and in no other way. The mortgages were to be paid, with six per cent. interest, within twelve months after the bank credit should fail to be current.

The necessary consequences of the establishment of this bank credit based upon mortgages, he conceived to be: That money would be multiplied; that landed men would be furnished at two per cent. with bank credits, which would be current in payment of debts; and that this two per cent. would pay all taxes.

In 1650, “Mr. Robinson”, presumably Henry Robinson, the author of “Englands Safety in Trades Encrease”, proposed as a remedy to prevent the export of coin “the creation of a public bank or exchange, with correspondence in Paris, Antwerp, Amsterdam, Rotterdam, and other principal places of trade, on which bills can be drawn to prevent the export of money, and thus multiply the stock of the nation.”¹

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