Theory and Practice of Banking

"When the First Edition was written in 1855-56, I found the Fundamental Conceptions and Principles of the current books on Political Economy so unsatisfactory that I was obliged to examine them at considerable length. Since then I have published the Dictionary of Political Economy, the Principles of Economical Philosophy, and the Elements of Economics, in which the foundations of the Science are thoroughly investigated and established, and therefore it is not necessary to do so in a work devoted to Banking. In this Edition those Fundamental Concepts and Laws only are investigated which are exclusively necessary for the Theory of Credit."

"At a very early age I became thoroughly conversant with the practical management of... landed property. In 1847 the Administration of the Poor Law in Scotland had fallen into great disorder. The district of country in which I then resided appointed a Committee [which] elected me as their Chairman and entrusted me with the duty of devising a new system of Poor Relief. The scheme which I prepared... and carried out... proved so successful that the Poor Law Board of Scotland requested me to draw up a Report of it to be laid before Parliament... My paper... had great effect in encouraging the rest of the country to adopt the same system and... it has been universally followed."

"At this time I had not read a line of any work on Political Economy; but the circumstances I have mentioned enabled me to acquire a store of facts from original knowledge and observation, which were of the greatest use to me when I was obliged to take up the subject."

"In 1853 I was invited to join the Direction of a Bank which had been formed under Sir Robert Peel's Joint Stock Banking Act of 1845. The Board of Trade had made certain promises to the Bank, which were essential to its existence, and which had been embodied in the Charter of the Bank with the express consent of the Board of Trade, and of their legal adviser... When the... Bank... applied... to carry out these engagements... the Board of Trade refused to fulfil them, on the alleged ground that they were illegal. When I joined the Direction, I found that the Directors had been endeavouring for three years to induce the Board of Trade to fulfil their engagements; but the Board had steadfastly refused..."

"The case being submitted to me... Upon reading the case I had prepared, the Attorney and Solicitor General decided, without the slightest hesitation, that my contention was right..."

"In the preparation of this case I was led to examine thoroughly the works of Adam Smith and John Stuart Mill, and I soon perceived that whatever merits in other respects they may possess, they were extremely defective in all matters relating to Credit, Banking, and the Foreign Exchanges."

"The of 1810, which was appointed in consequence of the serious depreciation of the Paper Currency caused by the extravagant issues of Bank Notes by the , in its Report, one of the most celebrated ever made to Parliament, and which is one of the great landmarks in Political Economy, laid down the principles that the Bank must regulate the issues of its Notes by the quantity of Bullion it held, and by the state of the Foreign Exchanges; but unfortunately it entirely omitted to state the practical measures by which its principles should be carried into effect."

"This Report was summarily rejected by Parliament in 1811: but it gradually won the assent of all competent men, and in 1819 the Committees of both Houses of Parliament adopted its doctrines. The Bank of England alone issued a protest against them; but the Bank itself was converted in 1827, and made some attempts to adopt these principles, but they all failed."

"The last attempt was that of the . This Act is expressly founded on the dogma that Bank Notes payable to bearer on demand are alone Currency, to the exclusion of all other forms of Credit: and it is intended to carry out a particular Theory of Currency: and the method it adopted was that of imposing a strict numerical limit on the Notes issued by the Bank."

"Every mercantile lawyer would at once say that the definition of Currency adopted by the framers of the Act is entirely erroneous; that the Act entirely fails to carry out the Theory of Currency it professes to do: that if that Theory was enforced the Bank could make no profits: and that no Bank constructed on that principle ever did, or could by any possibility, make any profits. Furthermore all the great authorities of former times, including the Bullion Report and Peel himself on several occasions, solemnly protested against imposing a strict numerical limit on the notes of the Bank. Mr. Thornton, the eminent banker, who was one of the authors of the Bullion Report, said, in 1804 that if this rule was strictly carried out in a period of commercial panic it would lead to universal failure."

"This opinion was fully verified in the monetary crisis of 1847: the only one which took place after the passing of the Act and before the publication of this work: and also in the subsequent crises of 1857 and 1866: when, if the Act had not been suspended, not only the Bank of England itself, but every Bank in England would have stopped payment, and all commerce been thrown into the most terrible convulsions."

"In the autumn of 1855 a very sudden and severe monetary drain took place. During this drain some very startling and extraordinary circumstances took place... Reflecting on these, I came to the conclusion that the only true method of controlling Credit and the Paper Currency is by sedulously adjusting the Rate of Discount by the Bullion in the Bank and by the state of the Foreign Exchanges. And I explained the reasoning on which this principle is founded in the first edition of this work."

"This doctrine, but very imperfectly understood and extremely unpopular at the time it was first published in 1856, is now universally acknowledged to be the true one, and is adopted by all the Banks in the world. It was acknowledged to be perfectly efficient by Mr. Norman, before the Committee of the House of Commons, on the crisis of 1857; it is the principle upon which the Bank of England is now managed; the Usury Laws in France were modified for the express purpose of enabling the Bank of France to adopt it: and through understanding and adopting this principle, the Notes of the Bank of France, which was obliged to suspend payments in cash during the misfortunes of the country, were enabled to circulate at par. In fact, this principle is now as well established among all competent persons as the Newtonian Law of Gravity."

"In that [first] edition [of this Book] also I investigated the Theory of Accommodation Paper, which has produced so many calamities, but which has been so much misunderstood. I explained wherein the true danger of Accommodation Paper consists. In 1861 the failure of Lawrence, Mortimer, and Schroder, popularly known as the great leather fraud case, took place. In his... judgment in the case, Mr. Commissioner Holroyd quoted the explanation given in this Work at great length, thereby giving the sanction of his high authority to its correctness."

"After the publication of the first edition of this Work, I was led to examine the works of the First School of Economists, the Physiocrates of France and I found that they originated the expression, "Production, Distribution, and Consumption" of Wealth; that they especially restricted the word Wealth to the material products of the earth, which are brought into Commerce and Exchanged; and that they expressly excluded Labour and Rights from the term Wealth; and that the expressions "Production, Distribution and Consumption" of Wealth and Commerce or Exchanges were used by them as equivalent and identical: but restricted to the material products of the earth, to the exclusion of Labour and Rights."

"In the first chapter of this Work I have shown that the ancients unanimously held that Exchangeability, or the capability of being bought and sold, is the sole essence and principle of Wealth; and that everything is technically Wealth which can be bought and sold, whatever its form may be. The ancients showed that there are three distinct orders or kinds of Quantities which can be bought and sold, namely: 1, Material Things; 2, Labour, or Personal Qualities; 3, Abstract Rights."

"Smith begins his work by speaking of real Wealth as being the produce of "Land and Labour," but further on he expressly classes Personal Qualities under the title of Fixed Capital, and Bank Notes, Bills of Exchange, &c., which are mere Rights, or Credit, under Circulating Capital. Thus he distinctly recognises the three orders of Exchangeable Quantities as Wealth. Moreover, he was well aware of the true and original meaning of the expression, "Production and Distribution," because he expressly says that the purport of his first two books is to investigate the Theory of Prices, and they are nothing but an investigation of the Theory of Value, more or less imperfect. McCulloch, in a note to his edition of the work, says that Political Economy might be defined as the Science of Values. Condillac published his work, le Commerce et le Gouvernement in 1776, the same year as Smith published his. He expressly defines Economics as the Science of Commerce, and the first book of his work, like that of Smith, is a Treatise on Commerce. But unfortunately, he never got beyond the Commerce of Material Products."

"Thus it will be seen that, as devised by its originators, the expression "Production, Distribution, and Consumption" is one, entire, and indivisible: and it must not be separated into its component terms."

"J. B. Say, who first defined Political Economy to be the Science of the Production, Distribution, and Consumption of Wealth, unfortunately totally overlooked this fact, and has divided his work into separate parts relating to these terms. He has been followed in this by his disciple, John Stuart Mill, who, however, varies from his master in adopting the term Production, Distribution, and Exchange of Wealth."

"Each of these works... have been utterly destructive of the scientific character of the subject. Each of these writers, like Smith, recognises Personal Qualities and Rights as Wealth. And how can we speak of the "Production, Distribution, and Consumption" of Labour and Rights? But it is quite usual to speak of the Supply and the Demand for Labour and Bills, which are mere Rights."

"Seeing... that Labour and Rights are now recognised as Wealth by all Economists, the most advanced Economists... have now seen that it is absolutely indispensable to resort to and adopt the term Commerce or Exchanges, as the only true conception by which the subject can be made a regular Science. Whately was the first person in this country who clearly explained this, when Professor at Oxford; and Bagehot has repeatedly said that Political Economy is the Theory of Business. Such was the conception I adopted on my first acquaintance with the subject."

"In 1858 I published the Elements of Political Economy, in which, for the first time, it was treated as the Science of Exchanges, or of Commerce, in accordance with the conception of its founders, and of Whately. Upon sending this work to M. , who was at that time the most distinguished Professor of Political Economy in Europe, he... used all his influence to popularise my doctrines in France."

"In 1875, when I had published [an] improved edition of the Elements... the Principles of Economical Philosophy, he wrote to me—"It is your book which serves me as the guide for all the Philosophy of my teaching at the Collége de France.""

"Being... acquainted with the Juridical Principles of Credit, I acquired a knowledge of their application in Commerce and Banking; from my own observation I then saw how utterly vague, contradictory, and inadequate the notions on the subject were in the works of literary Economists. Not an Economist... had the slightest idea of the fundamental distinction between a Bill of Exchange and a Bill of Lading, or of the distinction between the nature of the Funds and a Mortgage Deed, to which Mill and many others compare them. Moreover, Algebraists have for the last 150 years frequently given Debts as an example of Negative Quantities: but either they have given no explanation of the meaning of the term Negative as applied to Debts: or the few that have done so have given one which every jurist or man of business would tell them is quite erroneous."

"In the article Credit in my Dictionary of Political Economy, I explained the Juridical Theory of Credit, and showed the real meaning of the term Negative as applied to Debts: and showed the application of the principles of Law and Algebra to the great system of Credit and Banking; and also showed the strange self-contradictions of Say and Mill on the subject of Credit."

"In 1863 M. Rouher, ...Minister of Commerce and Agriculture ...one of the most distinguished Economists in France ...instructed M, Henri Kichelot one of the heads of Departments in his Ministry to draw up an account of my system of Political Economy, which he ordered to be distributed to all the Chambers of Commerce in the Empire."

"I was surprised to find that the complete Juridical Theory of Credit had been developed by the Roman Lawyers, and was contained in the Pandects; absolutely identical with the Theory of Credit in my Dictionary of Political Economy, simply from my own knowledge of Mercantile Law, and my observation of the actual mechanism of the system of Credit and Banking. There is not a single principle in my article which is not in the Pandects: and there is not a single principle in the Pandects which is not in my article; and the simple reason is this, that the Roman Lawyers and myself had exactly the same state of facts before us."

"The Royal Commissioners, who included the most eminent Lawyers of the day, Lord Cranworth, Lord Westbury, Lord Cairns, Lord Hatherley, Lord Selborne, Lord Penzance... upon an examination of my Paper, unanimously selected me to prepare the Digest of the Law of Instruments of Credit."

"Being therefore invested by the Commissioners with the duty—not of making a mere Digest of Cases and Statutes—but of making an authoritative declaration of "the Law," I formally excluded from the Digest the whole series of cases upon which the modern opinion of the Judges had been founded, as not being Law; I stated that, in fact, the Act of 1705 was entirely unnecessary to legalise Promissory Notes, as they were legal at Common Law."

"Fortified... by the private approbation of the Commissioners, I introduced the apparently new, but in reality the old and true, doctrines relating to Credit into my Principles of Economical Philosophy, published in 1872."

"In 1873 these very doctrines came before the Court of Queen's Bench in the case of Crouch v. the Credit Fonçier of England In the absence of the Lord Chief Justice, Mr. Justice (now Lord) Blackburn, delivered the judgment of the Court, re-stating... that Choses-in-action are not transferable at Common Law and that Instruments under seal cannot be made Negotiable. Thus, as the selected exponent of the Law, I was in direct conflict with the judgment of the Queen's Bench."

"In 1875... the very same question came before all the Judges in the great case of Goodwin v. Robarts. In this case the question was whether Scrip, which was a mere promise to deliver Bonds, possessed the attribute of Negotiability, of Currency, like Bank Notes, Bills of Exchange, and other Securities for Money. ...the Lord Chief Justice expressed the strongest condemnation of Lord Holt's cases, and said that they were a blot on our judicial history. In delivering the unanimous judgment of the Court he... held that the Act of 1705, which had always been supposed in the profession to have legalised them for the first time, was in reality only declaratory of the Common Law. The judgment... reversed the doctrines of the Queen's Bench... and affirmed the doctrines I had laid down in my Digest on these points, as the true statement of the Law."

"In delivering the judgment, the Lord Chief Justice... referring to my Competition Paper, ...said"We find it stated, in a Law tract by Mr. Macleod, entitled 'Specimen of a Digest of the Law of Bills of Exchange,' prepared, we believe, as a Report to the Government, but which, from its research and ability, deserves to be produced in a form calculated to ensure a wider circulation," &c.Thus I had already anticipated, in 1872, the suggestion of the Lord Chief Justice in 1875; and in this work I have embodied further portions of my Digest."

"Macleod's Theory and Practice of Banking, and the same author's Elements of Banking, are full of suggestion, and also very rich in historical material and economic discussion; but they contain matters of doctrine in which the author is at issue with the recognized authorities, and that, too, on points of the first importance."

"The author's "Theory and Practice of Banking" is one of the most valuable books in modern economics. A...[T]he author is a very acute critic and deals unsparingly with all opponents. Of course, an author who deals unsparingly with others is likely to receive hard blows in return, and Mr. Macleod has not escaped. His critics have dealt with him in two ways: either they have denounced some of his propositions, especially the leading one in his work on "The Theory of Credit," that it is essentially the same thing as capital, or his opponents have ignored him as unworthy of notice. Yet, when everything has been said concerning the defects in his reasonings, it must be acknowledged that he is one of the most suggestive, acute and able writers in political economy and finance of this generation. "The Theory and Practice of Banking" contains by far the best account of the Bank of England that has appeared. It is true that Gilbart's work, especially the latest edition revised by Mr. Michie, contains an excellent historical account of the operations of the bank, but the criticisms and sidelights thrown on its operations by Mr. Macleod are of great value. We have called the attention of our readers before... that if they desire to study the history and workings of that great institution, which is about to celebrate its four-hundredth anniversary, and which, in many respects, is the greatest bank in the world, we can heartily commend this work for serious study."

"He says, "It has been shown over and over again that credit is the name of a species of property, commodity, or merchandise, of the same nature as, but inferior in degree to, money; that it fulfills exactly the same function as money as a medium of exchange and circulation. It is a property, commodity, or merchandise cumulative to money; and is in all its effects on prices and production exactly equivalent to an equal sum of money. Credit is in fact to money what steam is to water; and like that power, while its use within proper limits is one of the most beneficial inventions ever devised by the ingenuity of man, its misuse by unskillful and unscrupulous persons has produced the most fearful calamities. Credit, like steam, has its limits; and we have now to investigate the proper limits of credit; and to explain the various methods by which it is extinguished." These paragraphs contain the pith of the author's views on this subject. He declares that "credit is of the same nature as money, being the right or title to a future payment." Of course, many economists differ radically from him in these statements. In the first place, two kinds of money are here mingled—representative money, like bank notes, and specie. No doubt a bank note is a right or title to future payment in specie, but specie is not a right or title to future payment in anything. This is true, unless the author means to assert that every kind of merchandise, houses, lands, and goods, are also rights or titles to payment. It must be admitted that a few writers have given this broad meaning to the term. Thus defined, the author's statement may have a real meaning, but otherwise it is faulty. Gold money is desired, not simply because it can command other things in exchange, but because it can be transformed into articles of various kinds which have the power of satisfying human desire. The metal had these uses or utilities long before it was ever employed as money. In truth, the money function is a later one which has been superimposed on the metal. However, whether our criticisms are correct or not, the work displays abundant learning, a profound study of the opinions of others, and is deserving of the most careful reading by all who wish to inform themselves on this very important subject."