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• Note
• Introduction
• Bibliographical Notes
• Introduction
• An Enquiry Into the Nature and Effects of the Paper Credit of Great Britain (1802)
• Chap. I
• Chap. Ii
• Chap. Iii
• Chap. Iv
• Chap. V.
• Chap. Vi
• Chap. Vii
• Chap. Viii
• Chap. Ix
• Chap. X
• Chapter Xi
• Appendix I: The Evidence Given By Henry Thornton Before the Committees of Secrecy of the Two Houses of Parliament On the Bank of England March and April 1797
• Appendix II: Manuscript Notes By Henry Thornton to Lord King’s Thoughts On the Effects of the Bank Restriction ( April 1804)
• Appendix III: Two Speeches of Henry Thornton, Esq. On the Bullion Report May, 1811

CHAP. I

Commercial credit may be defined to be that confidence which subsists among commercial men in respect to their mercantile affairs. This confidence operates in several ways. It disposes them to lend money to each other, to bring themselves under various pecuniary engagements by the acceptance and indorsement of bills, and also to sell and deliver goods in consideration of an equivalent promised to be given at a subsequent period. Even in that early and rude state of society, in which neither bills nor money are as yet known, it may be assumed, that if there be commerce, a certain degree of commercial credit will also subsist. In the interchange, for example, of commodities between the farmer and the manufacturer, the manufacturer, probably, will sometimes deliver goods to the farmer on the credit of the growing crop, in confidence that the farmer will come into possession of the fruits of his labour, and will be either compelled by the law of the land, or induced by a sense of justice, to fulfil his part of the contract when the harvest shall be over. In a variety of other cases it must happen, even in the infancy of society, that one man will deliver property to his neighbour without receiving, on the spot, the equivalent which is agreed to be given in return. It will occasionally be the interest of the one party thus to wait the other’s convenience: for he that reposes the confidence will receive in the price an adequate compensation for the disadvantages incurred by the risk and the delay. In a society in which law and the sense of moral duty are weak, and property is consequently insecure, there will, of course, be little confidence or credit, and there will also be little commerce.

This commercial credit is the foundation of paper credit; paper serving to express that confidence which is in the mind, and to reduce to writing those engagements to pay, which might otherwise be merely verbal. It will hereafter be explained in what manner, and to how very great a degree, paper credit also spares the use of the expensive article of gold; and how the multiplication of paper securities serves to enlarge, confirm, and diffuse that confidence among traders, which, in some measure, existed independently of paper, and would, to a certain degree, remain, though paper should be abolished.

If there may be a convenience in giving credit in the infancy of society, when the interchange of commodities is small, there may be, at least, the same convenience when goods begin to be multiplied, when wealth is more variously distributed, and society is advanced.

The day on which it suits the British merchant to purchase and send away a large quantity of goods, may not be that on which he finds it convenient to pay for them. If it is made necessary for him to give ready money in return, he must always have in his hands a very large stock of money; and for the expence of keeping this fund (an expence consisting chiefly in the loss of interest) he must be repaid in the price of the commodities in which he deals. He avoids this charge, and also obtains time for preparing and adjusting his pecuniary concerns, by buying on credit; that is to say, by paying for his goods not by money, but by the delivery of a note in which he promises the money on a future day. He is thus set more at liberty in his speculations: his judgement as to the propriety of buying or not buying, or of selling or not selling, and also as to the time of doing either, may be more freely exercised.

The general principle, according to which the length of the customary credit in different trades has adjusted itself, seems clearly to have been that of mutual advantage and convenience. For example, if we suppose the merchant importers of any particular article for home consumption to be generally rich, and the retailers of it to be poor—that is, to have a capital insufficient to enable them to keep the assortment and stock of goods necessary in their retail commerce—the credit customarily given by the importers, and taken by the retail traders, will naturally be long. In other words, it will be the custom of the importers to lend part of their capital to the retail dealers, in consideration of an advantage in the price proportionate to the benefit conferred by the loan. Sometimes two or more customs prevail, as to the period of credit, in the same trade; and to each custom there are individual exceptions. The deviations from the rule obviously arise out of that principle of mutual advantage and convenience on which the rule itself has been founded.

The option of buying and of selling on longer or shorter credit, as it multiplies the number of persons able to buy and to sell, promotes free competition, and thus contributes to lower the price of articles. A variety of degrees in the length of credit which is afforded, tends more especially to give to some of the poorer traders a greater power of purchasing, and cherishes that particular sort of competition most adapted to lower prices, namely, the competition of dealers likely to be contented with a very moderate rate of gain. Opulent merchants sometimes complain of the intrusion of dealers who possess a small capital and take long credit, for this very reason, that such dealers reduce the profits of trade.

But the custom of taking and giving long credit has its inconveniences as well as its advantages. It encreases the amount of the bad debts incurred in the course of commercial transactions. The apprehension of loss, is, therefore, continually operating on the mind of the lender as a restraint on the custom of giving credit, while the compensation he receives for the use of the capital which he supplies, acts as an encouragement to the practice. The subsisting state of credit may, in general, be considered as resulting out of a comparison made both by lenders and borrowers of the advantages and disadvantages which each discover that they derive from giving and taking credit.

Mercantile confidence, however, is not always dealt out in that proportion in which there is reasonable ground for it. At some periods it has risen to a most unwarrantable height, and has given occasion to the most extravagant and hurtful speculations. Of these the cases of the Ayr bank, and of the South Sea scheme, are instances. Evils of this kind, however, have a tendency to correct themselves. In a country possessed of commercial knowledge and experience, confidence, in most instances, will not be misplaced.

Some persons are of opinion, that, when the custom of buying on credit is pushed very far, and a great quantity of individual dealings is in consequence carried on by persons having comparatively little property, the national commerce is to be considered as unsupported by a proper capital; and that a nation, under such circumstances, whatever may be its ostensible riches, exhibits the delusive appearance of wealth.

It must, however, be remembered, that the practice of buying on credit, in the internal commerce of the country, supposes the habit of selling on credit also to subsist; and to prevail, on the whole, in an exactly equal degree. In respect to the foreign trade of a country, the practice of dealing on credit indicates poverty or riches, in proportion as the credit generally taken is longer or shorter than the credit given. The custom which tradesmen have of selling to the consumers on credit, is also an indication of wealth in the commercial world: the traders must possess a surplus of wealth, either their own or borrowed, which bears an exact proportion to the amount of debts due to them by the consumers. Thus that practice of trading on credit which prevails among us, so far as it subsists between trader and trader, is an indication neither of wealth nor of poverty in the mercantile body; so far as it respects our transactions with foreign countries, is an indication of extraordinary wealth belonging to the merchants of Great Britain; and so far as it respects the trade between the retailer and the consumer, implies a deficiency of wealth in the consumers, and a proportionate surplus of it among commercial men. The existing customs imply, that, on the whole, there is among our traders a great abundance of wealth.

It may conduce to the prevention of error, in the subsequent discussions, to define, in this place, what is meant by commercial capital. This consists, first, in the goods (part of them in the course of manufacture) which are in the hands of our manufacturers and dealers, and are in their way to consumption. The amount of these is necessarily larger or smaller in proportion as the general expenditure is more or less considerable, and in proportion, also, as commodities pass more or less quickly into the hands of the consumer. It further consists in the ships, buildings, machinery, and other dead stock maintained for the purpose of carrying on our manufactures and commerce, under which head may be included the gold found necessary for the purposes of commerce, but at all times forming a very small item in this great account. It comprehends also the debts due to our traders for goods sold and delivered by them on credit; debts finally to be discharged by articles of value given in return.

Commercial capital, let it then be understood, consists not in paper, and is not augmented by the multiplication of this medium of payment. In one sense, indeed, it may be encreased by paper. I mean, that the nominal value of the existing goods may be enlarged through a reduction which is caused by paper in the value of that standard by which all property is estimated. The paper itself forms no part of the estimate.

This mode of computing the amount of the national capital engaged in commerce, is substantially the same with that in which each commercial man estimates the value of his own property. Paper constitutes, it is true, an article on the credit side of the books of some men; but it forms an exactly equal item on the debit side of the books of others. It constitutes, therefore, on the whole, neither a debit nor a credit. The banker who issues twenty thousand pounds in notes, and lends in consequence twenty thousand pounds to the merchants on the security of bills accepted by them, states himself in his books to be debtor to the various holders of his notes to the extent of the sum in question; and states himself to be the creditor of the accepters of the bills in his possession to the same amount. His valuation, therefore, of his own property, is the same as if neither the bills nor the bank notes had any existence. Again; the merchants, in making their estimate of property, deduct the bills payable by themselves which are in the drawer of the banker, and add to their estimate the notes of the banker which are in their own drawer; so that the valuation, likewise, of the capital of the merchants is the same as if the paper had no existence. The use of paper does not, therefore, introduce any principle of delusion into that estimate of property which is made by individuals. The case of gold, on the other hand, differs from that of paper inasmuch as the possessor of gold takes credit for that for which no man debits himself. The several commercial capitals of traders, as estimated in their books, would, unquestionably, be found, if deducted from their other property and added together, to correspond, in amount, with a general estimate of the commercial stock of the country, calculated under the several heads already stated.

It is true, that men, in estimating their share in the public funds of the country, add to their estimate a debt due to them which no individual deducts from his valuation. On this head, it may be observed, that the nation is the debtor. But the commercial capital, which has been described, exists independently of capital in the public funds. The man in trade has property in trade. If he has property in the stocks, he has the property in trade in addition to it. In speaking, therefore, of the commercial capital, whether of the nation or of an individual, the idea that any part of it is composed either of the paper credit or of the stocks of the country, is to be totally excluded.