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In recent discussions of the growth of long-term capital loans in banking assets it is often assumed that theory sanctioned and practice conformed to the principle that short-term real commercial loans constitute the ideal type of asset. As a matter of fact, there has never been unanimity in theory or in practice on this subject. As is well known, the first asset of the Bank of England and, indeed, its raison d'être was a loan to the government of such permanence that it has not as yet been extinguished, and the establishment of the First Bank of the United States was largely due to the aid, in the shape of loans, it was expected to render the national government.
Although generalization is difficult, it would seem that a divergence of opinion arose largely from the existence of two main viewpoints of writers. Those whom we might call the theorists looked at the matter from the viewpoint of the money and banking theories current at the time; others were more influenced by practical considerations of self-interest and their thinking ran more in terms of the liquidity and profitability of assets from the point of view of an individual bank. These different viewpoints need not necessarily have led to conflicting opinions and, indeed, did not do so with the writers who identified the general with the particular interest. On the whole, however, it would seem that the real differences of opinion can be explained largely in the light of a writer's main interest in the subject.
As with many other topics, Adam Smith's views on the proper kind of bank assets are very important, both because he was the first to treat the subject in a cogent and exhaustive manner, and because of the undoubted influence he exerted on later writers. His discussion ran in terms of his theory of paper money although, as always, he was at pains to identify the general with the particular interest. As, according to Adam Smith:
money [meaning specie] is the only part of the circulating capital of a society, of which the maintenance can occasion any diminution in their net revenue[2].
It is important to economize such money and this is the function of banks. But there is a definite...