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Chapter 2

CHAPTER II.

OF MONEY, CONSIDERED AS A PARTICULAR BRANCH OF THE GENERAL STOCK OF THE
SOCIETY, OR OF THE EXPENSE OF MAINTAINING THE NATIONAL CAPITAL.

It has been shown in the First Book, that the price of the greater part of
commodities resolves itself into three parts, of which one pays the wages of
the labour, another the profits of the stock, and a third the rent of the
land which had been employed in producing and bringing them to market: that
there are, indeed, some commodities of which the price is made up of two of
those parts only, the wages of labour, and the profits of stock ; and a very
few in which it consists altogether in one, the wages of labour; but that
the price of every commodity necessarily resolves itself into some one or
other, or all, of those three parts; every part of it which goes neither to
rent nor to wages, being necessarily profit to some body.

Since this is the case, it has been observed, with regard to every
particular commodity, taken separately, it must be so with regard to all the
commodities which compose the whole annual produce of the land and labour of
every country, taken complexly. The whole price or exchangeable value of
that annual produce must resolve itself into the same three parts, and be
parcelled out among the different inhabitants of the country, either as the
wages of their labour, the profits of their stock, or the rent of their
land.

But though the whole value of the annual produce of the land and labour of
every country, is thus divided among, and constitutes a revenue to, its
different inhabitants ; yet, as in the rent of a private estate, we
distinguish between the gross rent and the neat rent, so may we likewise in
the revenue of all the inhabitants of a great country.

The gross rent of a private estate comprehends whatever is paid by the
farmer; the neat rent, what remains free to the landlord, after deducting
the expense of management, of repairs, and all other necessary charges; or
what, without hurting his estate, he can afford to place in his stock
reserved for immediate consumption, or to spend upon his table, equipage,
the ornaments of his house and furniture, his private enjoyments and
amusements. His real wealth is in proportion, not to his gross, but to his
neat rent.

The gross revenue of all the inhabitants of a great country comprehends the
whole annual produce of their land and labour; the neat revenue, what
remains free to them, after deducting the expense of maintaining first,
their fixed, and, secondly, their circulating capital, or what, without
encroaching upon their capital, they can place in their stock reserved for
immediate consumption, or spend upon their subsistence. conveniencies, and
amusements. Their real wealth, too, is in proportion, not to their gross,
but to their neat revenue.

The whole expense of maintaining the fixed capital must evidently be
excluded from the neat revenue of the society. Neither the materials
necessary for supporting their useful machines and instruments of trade,
their profitable buildings, etc. nor the produce of the labour necessary for
fashioning those materials into the proper form, can ever make any part of
it. The price of that labour may indeed make a part of it; as the workmen so
employed may place the whole value of their wages in their stock reserved
for immediate consumption. But in other sorts of labour, both the price and
the produce go to this stock ; the price to that of the workmen, the produce
to that of other people, whose subsistence, conveniencies, and amusements,
are augmented by the labour of those workmen.

The intention of the fixed capital is to increase the productive powers of
labour, or to enable the same number of labourers to perform a much greater
quantity of work. In a farm where all the necessary buildings, fences,
drains, communications, etc. are in the most perfect good order, the same
number of labourers and labouring cattle will raise a much greater produce,
than in one of equal extent and equally good ground, but not furnished with
equal conveniencies. In manufactures, the same number of hands, assisted
with the best machinery, will work up a much greater quantity of goods than
with more imperfect instruments of trade. The expense which is properly laid
out upon a fixed capital of any kind, is always repaid with great profit,
and increases the annual produce by a much greater value than that of the
support which such improvements require. This support, however, still
requires a certain portion of that produce. A certain quantity of materials,
and the labour of a certain number of workmen, both of which might have been
immediately employed to augment the food, clothing, and lodging, the
subsistence and conveniencies of the society, are thus diverted to another
employment, highly advantageous indeed, but still different from this one.
It is upon this account that all such improvements in mechanics, as enable
the same number of workmen to perform an equal quantity of work with cheaper
and simpler machinery than had been usual before, are always regarded as
advantageous to every society. A certain quantity of materials, and the
labour of a certain number of workmen, which had before been employed in
supporting a more complex and expensive machinery, can afterwards be applied
to augment the quantity of work which that or any other machinery is useful
only for performing. The undertaker of some great manufactory, who employs a
thousand a-year in the maintenance of his machinery, if he can reduce this
expense to five hundred, will naturally employ the other five hundred in
purchasing an additional quantity of materials, to he wrought up by an
additional number of workmen. The quantity of that work, therefore, which
his machinery was useful only for performing, will naturally be augmented,
and with it all the advantage and conveniency which the society can derive
from that work.

The expense of maintaining the fixed capital in a great country, may very
properly be compared to that of repairs in a private estate. The expense of
repairs may frequently be necessary for supporting the produce of the
estate, and consequently both the gross and the neat rent of the landlord.
When by a more proper direction, however, it can be diminished without
occasioning any diminution of produce, the gross rent remains at least the
same as before, and the neat rent is necessarily augmented.

But though the whole expense of maintaining the fixed capital is thus
necessarily excluded from the neat revenue of the society, it is not the
same case with that of maintaining the circulating capital. Of the four
parts of which this latter capital is composed, money, provisions,
materials, and finished work, the three last, it has already been observed,
are regularly withdrawn from it, and placed either in the fixed capital of
the society, or in their stock reserved for immediate consumption. Whatever
portion of those consumable goods is not employed in maintaining the former,
goes all to the latter, and makes a part of the neat revenue of the society.
The maintenance of those three parts of the circulating capital, therefore,
withdraws no portion of the annual produce from the neat revenue of the
society, besides what is necessary for maintaining the fixed capital.

The circulating capital of a society is in this respect different from that
of an individual. That of an individual is totally excluded from making any
part of his neat revenue, which must consist altogether in his profits. But
though the circulating capital of every individual makes a part of that of
the society to which he belongs, it is not upon that account totally
excluded from making a part likewise of their neat revenue. Though the whole
goods in a merchant's shop must by no means be placed in his own stock
reserved for immediate consumption, they may in that of other people, who,
from a revenue derived from other funds, may regularly replace their value
to him, together with its profits, without occasioning any diminution either
of his capital or of theirs.

Money, therefore, is the only part of the circulating capital of a society,
of which the maintenance can occasion any diminution in their neat revenue.

The fixed capital, and that part of the circulating capital which consists
in money, so far as they affect the revenue of the society, bear a very
great resemblance to one another.

First, as those machines and instruments of trade, etc. require a certain
expense, first to erect them, and afterwards to support them, both which
expenses, though they make a part of the gross, are deductions from the neat
revenue of the society ; so the stock of money which circulates in any
country must require a certain expense, first to collect it, and afterwards
to support it; both which expenses, though they make a part of the gross,
are, in the same manner, deductions from the neat revenue of the society. A
certain quantity of very valuable materials, gold and silver, and of very
curious labour, instead of augmenting the stock reserved for immediate
consumption, the subsistence, conveniencies, and amusements of individuals,
is employed in supporting that great but expensive instrument of commerce,
by means of which every individual in the society has his subsistence,
conveniencies, and amusements, regularly distributed to him in their proper
proportions.

Secondly, as the machines and instruments of trade, etc. which compose the
fixed capital either of an individual or of a society, make no part either
of the gross or of the neat revenue of either ; so money, by means of which
the whole revenue of the society is regularly distributed among all its
different members, makes itself no part of that revenue. The great wheel of
circulation is altogether different from the goods which are circulated by
means of it. The revenue of the society consists altogether in those goods,
and not in the wheel which circulates them. In computing either the gross or
the neat revenue of any society, we must always, from the whole annual
circulation of money and goods, deduct the whole value of the money, of
which not a single farthing can ever make any part of either.

It is the ambiguity of language only which can make this proposition appear
either doubtful or paradoxical. When properly explained and understood, it
is almost self-evident.

When we talk of any particular sum of money, we sometimes mean nothing but
the metal pieces of which it is composed, and sometimes we include in our
meaning some obscure reference to the goods which can be had in exchange for
it, or to the power of purchasing which the possession of it conveys. Thus,
when we say that the circulating money of England has been computed at
eighteen millions, we mean only to express the amount of the metal pieces,
which some writers have computed, or rather have supposed, to circulate in
that country. But when we say that a man is worth fifty or a hundred pounds
a-year, we mean commonly to express, not only the amount of the metal pieces
which are annually paid to him, but the value of the goods which he can
annually purchase or consume; we mean commonly to assertain what is or ought
to be his way of living, or the quantity and quality of the necessaries and
conveniencies of life in which he can with propriety indulge himself.

When, by any particular sum of money, we mean not only to express the amount
of the metal pieces of which it is composed, but to include in its
signification some obscure reference to the goods which can be had in
exchange for them, the wealth or revenue which it in this case denotes, is
equal only to one of the two values which are thus intimated somewhat
ambiguously by the same word, and to the latter more properly than to the
former, to the money's worth more properly than to the money.

Thus, if a guinea be the weekly pension of a particular person, he can in
the course of the week purchase with it a certain quantity of subsistence,
conveniencies, and amusements. In proportion as this quantity is great or
small, so are his real riches, his real weekly revenue. His weekly revenue
is certainly not equal both to the guinea and to what can be purchased with
it, but only to one or other of those two equal values, and to the latter
more properly than to the former, to the guinea's worth rather than to the
guinea.

If the pension of such a person was paid to him, not in gold, but in a
weekly bill for a guinea, his revenue surely would not so properly consist
in the piece of paper, as in what he could get for it. A guinea may be
considered as a bill for a certain quantity of necessaries and conveniencies
upon all the tradesmen in the neighbourhood The revenue of the person to
whom it is paid, does not so properly consist in the piece of gold, as in
what he can get for it, or in what he can exchange it for. If it could be
exchanged for nothing, it would, like a bill upon a bankrupt, be of no more
value than the most useless piece of paper.

Though the weekly or yearly revenue of all the different inhabitants of any
country, in the same manner, may be, and in reality frequently is, paid to
them in money, their real riches, however, the real weekly or yearly revenue
of all of them taken together, must always be great or small, in proportion
to the quantity of consumable goods which they can all of them purchase with
this money. The whole revenue of all of them taken together is evidently not
equal to both the money and the consumable goods, but only to one or other of
those two values, and to the latter more properly than to the former.

Though we frequently, therefore, express a person's revenue by the metal
pieces which are annually paid to him, it is because the amount of those
pieces regulates the extent of his power of purchasing, or the value of the
goods which he can annually afford to consume. We still consider his revenue
as consisting in this power of purchasing or consuming, and not in the
pieces which convey it.

But if this is sufficiently evident, even with regard to an individual, it
is still more so with regard to a society. The amount of the metal pieces
which are annually paid to an individual, is often precisely equal to his
revenue, and is upon that account the shortest and best expression of its
value. But the amount of the metal pieces which circulate in a society, can
never be equal to the revenue of all its members. As the same guinea which
pays the weekly pension of one man to-day, may pay that of another
to-morrow, and that of a third the day thereafter, the amount of the metal
pieces which annually circulate in any country, must always be of much less
value than the whole money pensions annually paid with them. But the power
of purchasing, or the goods which can successively be bought with the whole
of those money pensions, as they are successively paid, must always be
precisely of the same value with those pensions ; as must likewise be the
revenue of the different persons to whom they are paid. That revenue,
therefore, cannot consist in those metal pieces, of which the amount is so
much inferior to its value, but in the power of purchasing, in the goods
which can successively be bought with them as they circulate from hand to
hand.

Money, therefore, the great wheel of circulation, the great instrument of
commerce, like all other instruments of trade, though it makes a part, and a
very valuable part, of the capital, makes no part of the revenue of the
society to which it belongs; and though the metal pieces of which it is
composed, in the course of their annual circulation, distribute to every man
the revenue which properly belongs to him, they make themselves no part of
that revenue.

Thirdly, and lastly, the machines and instruments of trade, etc. which
compose the fixed capital, bear this further resemblance to that part of the
circulating capital which consists in money; that as every saving in the
expense of erecting and supporting those machines, which does not diminish
the introductive powers of labour, is an improvement of the neat revenue of
the society ; so every saving in the expense of collecting and supporting
that part of the circulating capital which consists in money is an
improvement of exactly the same kind.

It is sufficiently obvious, and it has partly, too, been explained already,
in what manner every saving in the expense of supporting the fixed capital
is an improvement of the neat revenue of the society. The whole capital of
the undertaker of every work is necessarily divided between his fixed and his
circulating capital. While his whole capital remains the same, the smaller
the one part, the greater must necessarily be the other. It is the
circulating capital which furnishes the materials and wages of labour, and
puts industry into motion. Every saving, therefore, in the expense of
maintaining the fixed capital, which does not diminish the productive powers
of labour, must increase the fund which puts industry into motion, and
consequently the annual produce of land and labour, the real revenue of
every society.

The substitution of paper in the room of gold and silver money, replaces a
very expensive instrument of commerce with one much less costly, and
sometimes equally convenient. Circulation comes to be carried on by a new
wheel, which it costs less both to erect and to maintain than the old one.
But in what manner this operation is performed, and in what manner it tends
to increase either the gross or the neat revenue of the society, is not
altogether so obvious, and may therefore require some further explication.

There are several different sorts of paper money; but the circulating notes
of banks and bankers are the species which is best known, and which seems
best adapted for this purpose.

When the people of any particular country have such confidence in the
fortune, probity and prudence of a particular banker, as to believe that
he is always ready to pay upon demand such of his promissory notes as are
likely to be at any time presented to him, those notes come to have the same
currency as gold and silver money, from the confidence that such money can
at any time be had for them.

A particular banker lends among his customers his own promissory notes, to
the extent, we shall suppose, of a hundred thousand pounds. As those notes
serve all the purposes of money, his debtors pay him the same interest as if
he had lent them so much money. This interest is the source of his gain.
Though some of those notes are continually coming back upon him for payment,
part of them continue to circulate for months and years together. Though he
has generally in circulation, therefore, notes to the extent of a hundred
thousand pounds, twenty thousand pounds in gold and silver may, frequently,
be a sufficient provision for answering occasional demands. By this
operation, therefore, twenty thousand pounds in gold and silver perform all
the functions which a hundred thousand could otherwise have performed. The
same exchanges may be made, the same quantity of consumable goods may be
circulated and distributed to their proper consumers, by means of his
promissory notes, to the value of a hundred thousand pounds, as by an equal
value of gold and silver money. Eighty thousand pounds of gold and silver,
therefore, can in this manner be spared from the circulation of the country
; and if different operations of the the same kind should, at the same time,
be carried on by many different banks and bankers, the whole circulation
may thus be conducted with a fifth part only of the gold and silver which
would otherwise have been requisite.

Let us suppose, for example, that the whole circulating money of some
particular country amounted, at a particular time, to one million sterling,
that sum being then sufficient for circulating the whole annual produce of
their land and labour; let us suppose, too, that some time thereafter,
different banks and bankers issued promissory notes payable to the bearer,
to the extent of one million, reserving in their different coffers two
hundred thousand pounds for answering occasional demands ; there would
remain, therefore, in circulation, eight hundred thousand pounds in gold and
silver, and a million of bank notes, or eighteen hundred thousand pounds of
paper and money together. But the annual produce of the land and labour of
the country had before required only one million to circulate and distribute
it to its proper consumers, and that annual produce cannot be immediately
augmented by those operations of banking. One million, therefore, will be
sufficient to circulate it after them. The goods to be bought and sold being
precisely the same as before, the same quantity of money will be sufficient
for buying and selling them. The channel of circulation, if I may be allowed
such an expression, will remain precisely the same as before. One million we
have supposed sufficient to fill that channel. Whatever, therefore, is
poured into it beyond this sum, cannot run into it, but must overflow. One
million eight hundred thousand pounds are poured into it. Eight hundred
thousand pounds, therefore, must overflow, that sum being over and above
what can be employed in the circulation of the country. But though this sum
cannot be employed at home, it is too valuable to be allowed to lie idle. It
will, therefore, be sent abroad, in order to seek that profitable employment
which it cannot find at home. But the paper cannot go abroad; because at a
distance from the banks which issue it, and from the country in which
payment of it can be exacted by law, it will not be received in common
payments. Gold and silver, therefore, to the amount of eight hundred
thousand pounds, will be sent abroad, and the channel of home circulation
will remain filled with a million of paper instead of a million of those
metals which filled it before.

But though so great a quantity of gold and silver is thus sent abroad, we
must not imagine that it is sent abroad for nothing, or that its proprietors
make a present of it to foreign nations. They will exchange it for foreign
goods of some kind or another, in order to supply the consumption either of
some other foreign country, or of their own.

If they employ it in purchasing goods in one foreign country, in order to
supply the consumption of another, or in what is called the carrying trade,
whatever profit they make will be in addition to the neat revenue of their
own country. It is like a new fund, created for carrying on a new trade;
domestic business being now transacted by paper, and the gold and silver
being converted into a fund for this new trade.

If they employ it in purchasing foreign goods for home consumption, they may
either, first, purchase such goods as are likely to be consumed by idle
people, who produce nothing, such as foreign wines, foreign silks, etc. ;
or, secondly, they may purchase an additional stock of materials, tools, and
provisions, in order to maintain and employ an additional number of
industrious people, who reproduce, with a profit, the value of their annual
consumption.

So far as it is employed in the first way, it promotes prodigality,
increases expense and consumption, without increasing production, or
establishing any permanent fund for supporting that expense, and is in every
respect hurtful to the society.

So far as it is employed in the second way, it promotes industry ; and
though it increases the consumption of the society, it provides a permanent
fund for supporting that consumption; the people who consume reproducing,
with a profit, the whole value of their annual consumption. The gross
revenue of the society, the annual produce of their land and labour, is
increased by the whole value which the labour of those workmen adds to the
materials upon which they are employed, and their neat revenue by what
remains of this value, after deducting what is necessary for supporting the
tools and instruments of their trade.

That the greater part of the gold and silver which being forced abroad by
those operations of banking, is employed in purchasing foreign goods for
home consumption, is, and must be, employed in purchasing those of this
second kind, seems not only probable, but almost unavoidable. Though some
particular men may sometimes increase their expense very considerably,
though their revenue does not increase at all, we maybe assured that no
class or order of men ever does so; because, though the principles of
common prudence do not always govern the conduct of every individual, they
always influence that of the majority of every class or order. But the
revenue of idle people, considered as a class or order, cannot, in the
smallest degree, be increased by those operations of banking. Their expense
in general, therefore, cannot be much increased by them, though that of a
few individuals among them may, and in reality sometimes is. The demand of
idle people, therefore, for foreign goods, being the same, or very nearly
the same as before, a very small part of the money which, being forced
abroad by those operations of banking, is employed in purchasing foreign
goods for home consumption, is likely to be employed in purchasing those for
their use. The greater part of it will naturally be destined for the
employment of industry, and not for the maintenance of idleness.

When we compute the quantity of industry which the circulating capital of
any society can employ, we must always have regard to those parts of it only
which consist in provisions, materials, and finished work ; the other, which
consists in money, and which serves only to circulate those three, must
always be deducted. In order to put industry into motion, three things are
requisite ; materials to work upon, tools to work with, and the wages or
recompence for the sake of which the work is done. Money is neither a
material to work upon, nor a tool to work with ; and though the wages of the
workman are commonly paid to him in money, his real revenue, like that of
all other men, consists, not in the money, but in the money's worth; not in
the metal pieces, but in what can be got for them.

The quantity of industry which any capital can employ, must evidently be
equal to the number of workmen whom it can supply with materials, tools, and
a maintenance suitable to the nature of the work. Money may be requisite for
purchasing the materials and tools of the work, as well as the maintenance
of the workmen ; but the quantity of industry which the whole capital can
employ, is certainly not equal both to the money which purchases, and to the
materials, tools, and maintenance, which are purchased with it, but only to
one or other of those two values, and to the latter more properly than to
the former.

When paper is substituted in the room of gold and silver money, the quantity
of the materials, tools, and maintenance, which the whole circulating
capital can supply, may be increased by the whole value of gold and silver
which used to be employed in purchasing them. The whole value of the great
wheel of circulation and distribution is added to the goods which are
circulated and distributed by means of it. The operation, in some measure,
resembles that of the undertaker of some great work, who, in consequence of
some improvement in mechanics, takes down his old machinery, and adds the
difference between its price and that of the new to his circulating capital,
to the fund from which he furnishes materials and wages to his workmen.

What is the proportion which the circulating money of any country bears to
the whole value of the annual produce circulated by means of it, it is
perhaps impossible to determine. It has been computed by different authors
at a fifth, at a tenth, at a twentieth, and at a thirtieth, part of that
value. But how small soever the proportion which the circulating money may
bear to the whole value of the annual produce, as but a part, and frequently
but a small part, of that produce, is ever destined for the maintenance of
industry, it must always bear a very considerable proportion to that part.
When, therefore, by the substitution of paper, the gold and silver
necessary for circulation is reduced to, perhaps, a fifth part of the former
quantity, if the value of only the greater part of the other four-fifths be
added to the funds which are destined for the maintenance of industry, it
must make a very considerable addition to the quantity of that industry,
and, consequently, to the value of the annual produce of land and labour.

An operation of this kind has, within these five-and-twenty or thirty years,
been performed in Scotland, by the erection of new banking companies in
almost every considerable town, and even in some country villages. The
effects of it have been precisely those above described. The business of the
country is almost entirely carried on by means of the paper of those
different banking companies, with which purchases and payments of all kinds
are commonly made. Silver very seldom appears, except in the change of a
twenty shilling bank note, and gold still seldomer. But though the conduct
of all those different companies has not been unexceptionable, and has
accordingly required an act of parliament to regulate it, the country,
notwithstanding, has evidently derived great benefit from their trade. I
have heard it asserted, that the trade of the city of Glasgow doubled in
about fifteen years after the first erection of the banks there; and that
the trade of Scotland has more than quadrupled since the first erection of
the two public banks at Edinburgh; of which the one, called the Bank of
Scotland, was established by act of parliament in 1695, and the other,
called the Royal Bank, by royal charter in 1727. Whether the trade, either
of Scotland in general, or of the city of Glasgow in particular, has really
increased in so great a proportion, during so short a period, I do not
pretend to know. If either of them has increased in this proportion, it
seems to be an effect too great to be accounted for by the sole operation of
this cause. That the trade and industry of Scotland, however, have increased
very considerably during this period, and that the banks have contributed a
good deal to this increase, cannot be doubted.

The value of the silver money which circulated in Scotland before the Union
in 1707, and which, immediately after it, was brought into the Bank of
Scotland, in order to be recoined, amounted to 411,117: 10: 9 sterling. No
account has been got of the gold coin ; but it appears from the ancient
accounts of the mint of Scotland, that the value of the gold annually coined
somewhat exceeded that of the silver. There were a good many people, too,
upon this occasion, who, from a diffidence of repayment, did not bring their
silver into the Bank of Scotland; and there was, besides, some English coin,
which was not called in. The whole value of the gold and silver, therefore,
which circulated in Scotland before the Union, cannot be estimated at less
than a million sterling. It seems to have constituted almost the whole
circulation of that country; for though the circulation of the Bank of
Scotland, which had then no rival, was considerable, it seems to have made
but a very small part of the whole. In the present times, the whole
circulation of Scotland cannot be estimated at less than two millions, of
which that part which consists in gold and silver, most probably, does not
amount to half a million. But though the circulating gold and silver of
Scotland have suffered so great a diminution during this period, its real
riches and prosperity do not appear to have suffered any. Its agriculture,
manufactures, and trade, on the contrary, the annual produce of its land and
labour, have evidently been augmented.

It is chiefly by discounting bills of exchange, that is, by advancing money
upon them before they are due, that the greater part of banks and bankers
issue their promissory notes. They deduct always, upon whatever sum they
advance, the legal interest till the bill shall become due. The payment of
the bill, when it becomes due, replaces to the bank the value of what had
been advanced, together with a clear profit of the interest. The banker, who
advances to the merchant whose bill he discounts, not gold and silver, but
his own promissory notes, has the advantage of being able to discount to a
greater amount by the whole value of his promissory notes, which he finds,
by experience, are commonly in circulation. He is thereby enabled to make
his clear gain of interest on so much a larger sum.

The commerce of Scotland, which at present is not very great, was still more
inconsiderable when the two first banking companies were established ; and
those companies would have had but little trade, had they confined their
business to the discounting of bills of exchange. They invented, therefore,
another method of issuing their promissory notes; by granting what they call
cash accounts, that is, by giving credit, to the extent of a certain sum
(two or three thousand pounds for example), to any individual who could
procure two persons of undoubted credit and good landed estate to become
surety for him, that whatever money should be advanced to him, within the
sum for which the credit had been given, should be repaid upon demand,
together with the legal interest. Credits of this kind are, I believe,
commonly granted by banks and bankers in all different parts of the world.
But the easy terms upon which the Scotch banking companies accept of
repayment are, so far as I know, peculiar to them, and have perhaps been the
principal cause, both of the great trade of those companies,and of the
benefit which the country has received from it.

Whoever has a credit of this kind with one of those companies, and borrows a
thousand pounds upon it, for example, may repay this sum piece-meal, by
twenty and thirty pounds at a time, the company discounting a proportionable
part of the interest of the great sum, from the day on which each of those
small sums is paid in, till the whole be in this manner repaid. All
merchants, therefore, and almost all men of business, find it convenient to
keep such cash accounts with them, and are thereby interested to promote the
trade of those companies, by readily receiving their notes in all payments,
and by encouraging all those with whom they have any influence to do the
same. The banks, when their customers apply to them for money, generally
advance it to them in their own promissory notes. These the merchants pay
away to the manufacturers for goods, the manufacturers to the farmers for
materials and provisions, the farmers to their landlords for rent; the
landlords repay them to the merchants for the conveniencies and luxuries
with which they supply them, and the merchants again return them to the
banks, in order to balance their cash accounts, or to replace what they my
have borrowed of them ; and thus almost the whole money business of the
country is transacted by means of them. Hence the great trade of those
companies.

By means of those cash accounts, every merchant can, without imprudence,
carry on a greater trade than he otherwise could do. If there are two
merchants, one in London and the other in Edinburgh, who employ equal stocks
in the same branch of trade, the Edinburgh merchant can, without imprudence,
carry on a greater trade, and give employment to a greater number of people,
than the London merchant. The London merchant must always keep by him a
considerable sum of money, either in his own coffers, or in those of his
banker, who gives him no interest for it, in order to answer the demands
continually coming upon him for payment of the goods which he purchases upon
credit. Let the ordinary amount of this sum be supposed five hundred pounds
; the value of the goods in his warehouse must always be less, by five
hundred pounds, than it would have been, had he not been obliged to keep
such a sum unemployed. Let us suppose that he generally disposes of his
whole stock upon hand, or of goods to the value of his whole stock upon
hand, once in the year. By being obliged to keep so great a sum unemployed,
he must sell in a year five hundred pounds worth less goods than he might
otherwise have done. His annual profits must be less by all that he could
have made by the sale of five hundred pounds worth more goods ; and the
number of people employed in preparing his goods for the market must be less
by all those that five hundred pounds more stock could have employed. The
merchant in Edinburgh, on the other hand, keeps no money unemployed for
answering such occasional demands. When they actually come upon him, he
satisfies them from his cash account with the bank, and gradually replaces
the sum borrowed with the money or paper which comes in from the occasional
sales of his goods. With the same stock, therefore, he can, without
imprudence, have at all times in his warehouse a larger quantity of goods
than the London merchant ; and can thereby both make a greater profit
himself, and give constant employment to a greater number of industrious
people who prepare those goods for the market. Hence the great benefit which
the country has derived from this trade.

The facility of discounting bills of exchange, it may be thought, indeed,
gives the English merchants a conveniency equivalent to the cash accounts of
the Scotch merchants. But the Scotch merchants, it must be remembered, can
discount their bills of exchange as easily as the English merchants; and
have, besides, the additional conveniency of their cash accounts.

The whole paper money of every kind which can easily circulate in any
country, never can exceed the value of the gold and silver, of which it
supplies the place, or which (the commerce being supposed the same) would
circulate there, if there was no paper money. If twenty shilling notes, for
example, are the lowest paper money current in Scotland, the whole of that
currency which can easily circulate there, cannot exceed the sum of gold and
silver which would be necessary for transacting the annual exchanges of
twenty shillings value and upwards usually transacted within that country.
Should the circulating paper at any time exceed that sum, as the excess
could neither be sent abroad nor be employed in the circulation of the
country, it must immediately return upon the banks, to be exchanged for gold
and silver. Many people would immediately perceive that they had more of
this paper than was necessary for transacting their business at home; and as
they could not send it abroad, they would immediately demand payment for it
from the banks. When this superfluous paper was converted into gold and
silver, they could easily find a use for it, by sending it abroad; but they
could find none while it remained in the shape of paper. There would
immediately, therefore, be a run upon the banks to the whole extent of this
superfluous paper, and if they showed any difficulty or backwardness in
payment, to a much greater extent ; the alarm which this would occasion
necessarily increasing the run.

Over and above the expenses which are common to every branch of trade, such
as the expense of house-rent, the wages of servants, clerks, accountants,
etc. the expenses peculiar to a bank consist chiefly in two articles: first,
in the expense of keeping at all times in its coffers, for answering the
occasional demands of the holders of its notes, a large sum of money, of
which it loses the interest; and, secondly, in the expense of replenishing
those coffers as fast as they are emptied by answering such occasional
demands.

A banking company which issues more paper than can be employed in the
circulation of the country, and of which the excess is continually returning
upon them for payment, ought to increase the quantity of gold and silver
which they keep at all times in their coffers, not only in proportion to
this excessive increase of their circulation, but in a much greater
proportion; their notes returning upon them much faster than in proportion
to the excess of their quantity. Such a company, therefore, ought to
increase the first article of their expense, not only in proportion to this
forced increase of their business, but in a much greater proportion.

The coffers of such a company, too, though they ought to be filled much
fuller, yet must empty themselves much faster than if their business was
confined within more reasonable bounds, and must require not only a more
violent, but a more constant and uninterrupted exertion of expense, in order
to replenish them, The coin, too, which is thus continually drawn in such
large quantities from their coffers, cannot be employed in the circulation
of the country. It comes in place of a paper which is over and above what can
be employed in that circulation, and is, therefore, over and above what can
be employed in it too. But as that coin will not be allowed to lie idle, it
must, in one shape or another, be sent abroad, in order to find that
profitable employment which it cannot find at home; and this continual
exportation of gold and silver, by enhancing the difficulty, must
necessarily enhance still farther the expense of the bank, in finding new
gold and silver in order to replenish those coffers, which empty themselves
so very rapidly. Such a company, therefore, must in proportion to this
forced increase of their business, increase the second article of their
expense still more than the first.

Let us suppose that all the paper of a particular bank, which the
circulation of the country can easily absorb and employ, amounts exactly to
forty thousand pounds, and that, for answering occasional demands, this bank
is obliged to keep at all times in its coffers ten thousand pounds in gold
and silver. Should this bank attempt to circulate forty-four thousand
pounds, the four thousand pounds which are over and above what the
circulation can easily absorb and employ, will return upon it almost as fast
as they are issued. For answering occasional demands, therefore, this bank
ought to keep at all times in its coffers, not eleven thousand pounds only,
but fourteen thousand pounds. It will thus gain nothing by the interest of
the four thousand pounds excessive circulation ; and it will lose the whole
expense of continually collecting four thousand pounds in gold and silver,
which will be continually going out of its coffers as fast as they are
brought into them.

Had every particular banking company always understood and attended to its
own particular interest, the circulation never could have been overstocked
with paper money. But every particular banking company has not always
understood or attended to its own particular interest, and the circulation
has frequently been overstocked with paper money.

By issuing too great a quantity of paper, of which the excess was
continually returning, in order to be exchanged for gold and silver, the
Bank of England was for many years together obliged to coin gold to the
extent of between eight hundred thousand pounds and a million a-year; or, at
an average, about eight hundred and fifty thousand pounds. For this great
coinage, the bank (inconsequence of the worn and degraded state into which
the gold coin had fallen a few years ago) was frequently obliged to purchase
gold bullion at the high price of four pounds an ounce, which it soon after
issued in coin at 3:17:10 1/2 an ounce, losing in this manner between two
and a half and three per cent. upon the coinage of so very large a sum.
Though the bank, therefore, paid no seignorage, though the government was
properly at the expense of this coinage, this liberality of government did
not prevent altogether the expense of the bank.

The Scotch banks, in consequence of an excess of the same kind, were all
obliged to employ constantly agents at London to collect money for them, at
an expense which was seldom below one and a half or two per cent. This money
was sent down by the waggon, and insured by the carriers at an additional
expense of three quarters per cent. or fifteen shillings on the hundred
pounds. Those agents were not always able to replenish the coffers of their
employers so fast as they were emptied. In this case, the resource of the
banks was, to draw upon their correspondents in London bills of exchange, to
the extent of the sum which they wanted. When those correspondents
afterwards drew upon them for the payment of this sum, together with the
interest and commission, some of those banks, from the distress into which
their excessive circulation had thrown them, had sometimes no other means of
satisfying this draught, but by drawing a second set of bills, either upon
the same, or upon some other correspondents in London; and the same sum, or
rather bills for the same sum, would in this manner make sometimes more than
two or three journeys ; the debtor bank paying always the interest and
commission upon the whole accumulated sum. Even those Scotch banks which
never distinguished themselves by their extreme imprudence, were sometimes
obliged to employ this ruinous resource.

The gold coin which was paid out, either by the Bank of England or by the
Scotch banks, in exchange for that part of their paper which was over and
above what could be employed in the circulation of the country, being
likewise over and above what could be employed in that circulation, was
sometimes sent abroad in the shape of coin, sometimes melted down and sent
abroad in the shape of bullion, and sometimes melted down and sold to the
Bank of England at the high price of four pounds an ounce. It was the
newest, the heaviest, and the best pieces only, which were carefully picked
out of the whole coin, and either sent abroad or melted down. At home, and
while they remained in the shape of coin, those heavy pieces were of no more
value than the light ; but they were of more value abroad, or when melted
down into bullion at home. The Bank of England, notwithstanding their great
annual coinage, found, to their astonishment, that there was every year the
same scarcity of coin as there had been the year before ; and that,
notwithstanding the great quantity of good and new coin which was every year
issued from the bank, the state of the coin, instead of growing better and
better, became every year worse and worse. Every year they found themselves
under the necessity of coining nearly the same quantity of gold as they had
coined the year before ; and from the continual rise in the price of gold
bullion, in consequence of the continual wearing and clipping of the coin,
the expense of this great annual coinage became, every year, greater and
greater. The Bank of England, it is to be observed, by supplying its own
coffers with coin, is indirectly obliged to supply the whole kingdom, into
which coin is continually flowing from those coffers in a great variety of
ways. Whatever coin, therefore, was wanted to support this excessive
circulation both of Scotch and English paper money, whatever vacuities this
excessive circulation occasioned in the necessary coin of the kingdom, the
Bank of England was obliged to supply them. The Scotch banks, no doubt, paid
all of them very dearly for their own imprudence and inattention : but the
Bank of England paid very dearly, not only for its own imprudence, but for
the much greater imprudence of almost all the Scotch banks.

The over-trading of some bold projectors in both parts of the united
kingdom, was the original cause of this excessive circulation of paper
money.

What a bank can with propriety advance to a merchant or undertaker of any
kind, is not either the whole capital with which he trades, or even any
considerable part of that capital; but that part of it only which he would
otherwise be obliged to keep by him unemployed and in ready money, for
answering occasional demands. If the paper money which the bank advances
never exceeds this value, it can never exceed the value of the gold and
silver which would necessarily circulate in the country if there was no
paper money; it can never exceed the quantity which the circulation of the
country can easily absorb and employ.

When a bank discounts to a merchant a real bill of exchange, drawn by a real
creditor upon a real debtor, and which, as soon as it becomes due, is really
paid by that debtor ; it only advances to him a part of the value which he
would otherwise be obliged to keep by him unemployed and in ready money, for
answering occasional demands. The payment of the bill, when it becomes due,
replaces to the bank the value of what it had advanced, together with the
interest. The coffers of the bank, so far as its dealings are confined to
such customers, resemble a water-pond, from which, though a stream is
continually running out, yet another is continually running in, fully equal
to that which runs out; so that, without any further care or attention, the
pond keeps always equally, or very near equally full. Little or no expense
can ever be necessary for replenishing the coffers of such a bank.

A merchant, without over-trading, may frequently have occasion for a sum of
ready money, even when he has no bills to discount. When a bank, besides
discounting his bills, advances him likewise, upon such occasions, such sums
upon his cash account, and accepts of a piece-meal repayment, as the money
comes in from the occasional sale of his goods, upon the easy terms of the
banking companies of Scotland; it dispenses him entirely from the necessity
of keeping any part of his stock by him unemployed and in ready money for
answering occasional demands. When such demands actually come upon him, he
can answer them sufficiently from his cash account. The bank, however, in
dealing with such customers, ought to observe with great attention, whether,
in the course of some short period (of four, five, six, or eight months, for
example), the sum of the repayments which it commonly receives from them,
is, or is not, fully equal to that of the advances which it commonly makes
to them. If, within the course of such short periods, the sum of the
repayments from certain customers is, upon most occasions, fully equal to
that of the advances, it may safely continue to deal with such customers.
Though the stream which is in this case continually running out from its
coffers may be very large, that which is continually running into them must
be at least equally large. so that, without any further care or attention,
those coffers are likely to be always equally or very near equally full, and
scarce ever to require any extraordinary expense to replenish them. If, on
the contrary, the sum of the repayments from certain other customers, falls
commonly very much short of the advances which it makes to them, it cannot
with any safety continue to deal with such customers, at least if they
continue to deal with it in this manner. The stream which is in this case
continually running out from its coffers, is necessarily much larger than
that which is continually running in ; so that, unless they are replenished
by some great and continual effort of expense, those coffers must soon be
exhausted altogether.

The banking companies of Scotland, accordingly, were for a long time very
careful to require frequent and regular repayments from all their customers,
and did not care to deal with any person, whatever might be his fortune or
credit, who did not make, what they called, frequent and regular operations
with them. By this attention, besides saving almost entirely the
extraordinary expense of replenishing their coffers, they gained two other
very considerable advantages.

First, by this attention they were enabled to make some tolerable judgment
concerning the thriving or declining circumstances of their debtors, without
being obliged to look out for any other evidence besides what their own
books afforded them ; men being, for the most part, either regular or
irregular in their repayments, according as their circumstances are either
thriving or declining. A private man who lends out his money to perhaps half
a dozen or a dozen of debtors, may, either by himself or his agents, observe
and inquire both constantly and carefully into the conduct and situation of
each of them. But a banking company, which lends money to perhaps five
hundred different people, and of which the attention is continually occupied
by objects of a very different kind, can have no regular information
concerning the conduct and circumstances of the greater part of its debtors,
beyond what its own books afford it. In requiring frequent and regular
repayments from all their customers, the banking companies of Scotland had
probably this advantage in view.

Secondly, by this attention they secured themselves from the possibility of
issuing more paper money than what the circulation of the country could
easily absorb and employ. When they observed, that within moderate periods
of time, the repayments of a particular customer were, upon most occasions,
fully equal to the advances which they had made to him, they might be
assured that the paper money which they had advanced to him had not, at any
time, exceeded the quantity of gold and silver which he would otherwise have
been obliged to keep by him for answering occasional demands; and that,
consequently, the paper money, which they had circulated by his means, had
not at any time exceeded the quantity of gold and silver which would have
circulated in the country, had there been no paper money. The frequency,
regularity, and amount of his repayments, would sufficiently demonstrate
that the amount of their advances had at no time exceeded that part of his
capital which he would otherwise have been obliged to keep by him
unemployed, and in ready money, for answering occasional demands; that is,
for the purpose of keeping the rest of his capital in constant employment.
It is this part of his capital only which, within moderate periods of time,
is continually returning to every dealer in the shape of money, whether
paper or coin, and continually going from him in the same shape. If the
advances of the bank had commonly exceeded this part of his capital, the
ordinary amount of his repayments could not, within moderate periods of
time, have equalled the ordinary amount of its advances. The stream which,
by means of his dealings, was continually running into the coffers of the
bank, could not have been equal to the stream which, by means of the same
dealings was continually running out. The advances of the bank paper, by
exceeding the quantity of gold and silver which, had there been no such
advances, he would have been obliged to keep by him for answering occasional
demands, might soon come to exceed the whole quantity of gold and silver
which ( the commerce being supposed the same ) would have circulated in the
country, had there been no paper money; and, consequently, to exceed the
quantity which the circulation of the country could easily absorb and employ
; and the excess of this paper money would immediately have returned upon
the bank, in order to be exchanged for gold and silver. This second
advantage, though equally real, was not, perhaps, so well understood by all
the different banking companies in Scotland as the first.

When, partly by the conveniency of discounting bills, and partly by that of
cash accounts, the creditable traders of any country can be dispensed from
the necessity of keeping any part of their stock by them unemployed, and in
ready money, for answering occasional demands, they can reasonably expect no
farther assistance from hanks and bankers, who, when they have gone thus
far, cannot, consistently with their own interest and safety, go farther. A
bank cannot, consistently with its own interest, advance to a trader the
whole, or even the greater part of the circulating capital with which he
trades ; because, though that capital is continually returning to him in the
shape of money, and going from him in the same shape, yet the whole of the
returns is too distant from the whole of the outgoings, and the sum of his
repayments could not equal the sum of his advances within such moderate
periods of time as suit the conveniency of a bank. Still less could a bank
afford to advance him any considerable part of his fixed capital ; of the
capital which the undertaker of an iron forge, for example, employs in
erecting his forge and smelting-houses, his work-houses, and warehouses, the
dwelling-houses of his workmen, etc. ; of the capital which the undertaker
of a mine employs in sinking his shafts, in erecting engines for drawing out
the water, in making roads and waggon-ways, etc. ; of the capital which the
person who undertakes to improve land employs in clearing, draining,
inclosing, manuring, and ploughing waste and uncultivated fields; in
building farmhouses, with all their necessary appendages of stables,
granaries, etc. The returns of the fixed capital are, in almost all
cases, much slower than those of the circulating capital : and such
expenses, even when laid out with the greatest prudence and judgment, very
seldom return to the undertaker till after a period of many years, a period
by far too distant to suit the conveniency of a bank. Traders and other
undertakers may, no doubt with great propriety, carry on a very considerable
part of their projects with borrowed money. In justice to their creditors,
however, their own capital ought in this case to be sufficient to insure, if
I may say so, the capital of those creditors; or to render it extremely
improbable that those creditors should incur any loss, even though the
success of the project should fall very much short of the expectation of the
projectors. Even with this precaution, too, the money which is borrowed, and
which it is meant should not be repaid till after a period of several years,
ought not to be borrowed of a bank, but ought to be borrowed upon bond or
mortgage, of such private people as propose to live upon the interest of
their money, without taking the trouble themselves to employ the capital,
and who are, upon that account, willing to lend that capital to such people
of good credit as are likely to keep it for several years. A bank, indeed,
which lends its money without the expense of stamped paper, or of attorneys'
fees for drawing bonds and mortgages, and which accepts of repayment upon
the easy terms of the banking companies of Scotland, would, no doubt, be a
very convenient creditor to such traders and undertakers. But such traders
and undertakers would surely be most inconvenient debtors to such a bank.

It is now more than five and twenty years since the paper money issued by
the different banking companies of Scotland was fully equal, or rather was
somewhat more than fully equal, to what the circulation of the country could
easily absorb and employ. Those companies, therefore, had so long ago given
all the assistance to the traders and other undertakers of Scotland which it
is possible for banks and bankers, consistently with their own interest, to
give. They had even done somewhat more. They had over-traded a little, and
had brought upon themselves that loss, or at least that diminution of
profit, which, in this particular business, never fails to attend the
smallest degree of over-trading. Those traders and other undertakers, having
got so much assistance from banks and bankers, wished to get still more. The
banks, they seem to have thought, could extend their credits to whatever sum
might be wanted, without incurring any other expense besides that of a few
reams of paper. They complained of the contracted views and dastardly spirit
of the directors of those banks, which did not, they said, extend their
credits in proportion to the extension of the trade of the country ;
meaning, no doubt, by the extension of that trade, the extension of their
own projects beyond what they could carry on either with their own capital,
or with what they had credit to borrow of private people in the usual way of
bond or mortgage. The banks, they seem to have thought, were in honour bound
to supply the deficiency, and to provide them with all the capital which
they wanted to trade with. The banks, however, were of a different opinion ;
and upon their refusing to extend their credits, some of those traders had
recourse to an expedient which, for a time, served their purpose, though at
a much greater expense, yet as effectually as the utmost extension of bank
credits could have done. This expedient was no other than the well known
shift of drawing and redrawing; the shift to which unfortunate traders have
sometimes recourse, when they are upon the brink of bankruptcy. The practice
of raising money in this manner had been long known in England ; and, during
the course of the late war, when the high profits of trade afforded a great
temptation to over-trading, is said to have been carried on to a very great
extent. From England it was brought into Scotland, where, in proportion to
the very limited commerce, and to the very moderate capital of the country,
it was soon carried on to a much greater extent than it ever had been in
England.

The practice of drawing and redrawing is so well known to all men of
business, that it may, perhaps, be thought unnecessary to give any account
of it. But as this book may come into the hands of many people who are not
men of business, and as the effects of this practice upon the banking trade
are not, perhaps, generally understood, even by men of business themselves, I
shall endeavour to explain it as distinctly as I can.

The customs of merchants, which were established when the barbarous laws
of Europe did not enforce the performance of their contracts, and which,
during the course of the two last centuries, have been adopted into the laws
of all European nations, have given such extraordinary privileges to bills
of exchange, that money is more readily advanced upon them than upon any
other species of obligation; especially when they are made payable within so
short a period as two or three months after their date. If, when the bill
becomes due, the acceptor does not pay it as soon as it is presented, he
becomes from that moment a bankrupt. The bill is protested, and returns upon
the drawer, who, if he does not immediately pay it, becomes likewise a
bankrupt. If, before it came to the person who presents it to the acceptor
for payment, it had passed through the hands of several other persons, who
had successively advanced to one another the contents of it, either in money
or goods, and who, to express that each of them had in his turn received
those contents, had all of them in their order indorsed, that is, written
their names upon the back of the bill; each indorser becomes in his turn
liable to the owner of the bill for those contents, and, if he fails to pay,
he becomes too, from that moment, a bankrupt. Though the drawer, acceptor,
and indorsers of the bill, should all of them be persons of doubtful credit;
yet, still the shortness of the date gives some security to the owner of the
bill. Though all of them may be very likely to become bankrupts, it is a
chance if they all become so in so short a time. The house is crazy, says a
weary traveller to himself, and will not stand very long; but it is a chance
if it falls to-night, and I will venture, therefore, to sleep in it
to-night.

The trader A in Edinburgh, we shall suppose, draws a bill upon B in London,
payable two months after date. In reality B in London owes nothing to A in
Edinburgh; but he agrees to accept of A 's bill, upon condition, that before
the term of payment he shall redraw upon A in Edinburgh for the same sum,
together with the interest and a commission, another bill, payable likewise
two months after date. B accordingly, before the expiration of the first two
months, redraws this bill upon A in Edinburgh ; who, again before the
expiration of the second two months, draws a second bill upon B in London,
payable likewise two months after date; and before the expiration of the
third two months, B in London redraws upon A in Edinburgh another bill
payable also two months after date. This practice has sometimes gone on, not
only for several months, but for several years together, the bill always
returning upon A in Edinburgh with the accumulated interest and commission
of all the former bills. The interest was five per cent. in the year, and
the commission was never less than one half per cent. on each draught. This
commission being repeated more than six times in the year, whatever money A
might raise by this expedient might necessarily have cost him something more
than eight per cent. in the year and sometimes a great deal more, when
either the price of the commission happened to rise, or when he was obliged
to pay compound interest upon the interest and commission of former bills.
This practice was called raising money by circulation.

In a country where the ordinary profits of stock, in the greater part of
mercantile projects, are supposed to run between six and ten per cent. it
must have been a very fortunate speculation, of which the returns could not
only repay the enormous expense at which the money was thus borrowed for
carrying it on, but afford, besides, a good surplus profit to the projector.
Many vast and extensive projects, however, were undertaken, and for several
years carried on, without any other fund to support them besides what was
raised at this enormous expense. The projectors, no doubt, had in their
golden dreams the most distinct vision of this great profit. Upon their
awakening, however, either at the end of their projects, or when they were
no longer able to carry them on, they very seldom, I believe, had the good
fortune to find it .

{The method described in the text was by no means either the most common or
the most expensive one in which those adventurers sometimes raised money by
circulation. It frequently happened, that A in Edinburgh would enable B in
London to pay the first bill of exchange, by drawing, a few days before it
became due, a second bill at three months date upon the same B in London.
This bill, being payable to his own order, A sold in Edinburgh at par ; and
with its contents purchased bills upon London, payable at sight to the order
of B, to whom he sent them by the post. Towards the end of the late war, the
exchange between Edinburgh and London was frequently three per cent. against
Edinburgh, and those bills at sight must frequently have cost A that
premium. This transaction, therefore, being repeated at least four times in
the year, and being loaded with a commission of at least one half per cent.
upon each repetition, must at that period have cost A, at least, fourteen
per cent. in the year. At other times A would enable to discharge the first
bill of exchange, by drawing, a few days before it became due, a second bill
at two months date, not upon B, but upon some third person, C, for example,
in London. This other bill was made payable to the order of B, who, upon its
being accepted by C, discounted it with some banker in London ; and A
enabled C to discharge it, by drawing, a few day's before it became due, a
third bill likewise at two months date, sometimes upon his first
correspondent B, and sometimes upon some fourth or fifth person, D or E, for
example. This third bill was made payable to the order of C, who, as soon as
it was accepted, discounted it in the same manner with some banker in
London. Such operations being repeated at least six times in the year, and
being loaded with a commission of at least one half per cent. upon each
repetition, together with the legal interest of five per cent. this method
of raising money, in the same manner as that described in the text, must
have cost A something more than eight per cent. By saving, however, the
exchange between Edinburgh and London, it was less expensive than that
mentioned in the foregoing part of this note ; but then it required an
established credit with more houses than one in London, an advantage which
many of these adventurers could not always find it easy to procure.}

The bills which A in Edinburgh drew upon B in London, he regularly
discounted two months before they were due, with some bank or banker in
Edinburgh ; and the bills which B in London redrew upon A in Edinburgh, he
as regularly discounted, either with the Bank of England, or with some other
banker in London. Whatever was advanced upon such circulating bills was in
Edinburgh advanced in the paper of the Scotch banks ; and in London, when
they were discounted at the Bank of England in the paper of that bank.
Though the bills upon which this paper had been advanced were all of them
repaid in their turn as soon as they became due, yet the value which had
been really advanced upon the first bill was never really returned to the
banks which advanced it ; because, before each bill became due, another bill
was always drawn to somewhat a greater amount than the bill which was soon
to be paid: and the discounting of this other bill was essentially necessary
towards the payment of that which was soon to be due. This payment,
therefore, was altogether fictitious. The stream which, by means of those
circulating bills of exchange, had once been made to run out from the
coffers of the banks, was never replaced by any stream which really ran into
them.

The paper which was issued upon those circulating bills of exchange
amounted, upon many occasions, to the whole fund destined for carrying on
some vast and extensive project of agriculture, commerce, or manufactures ;
and not merely to that part of it which, had there been no paper money, the
projector would have been obliged to keep by him unemployed, and in ready
money, for answering occasional demands. The greater part of this paper was,
consequently, over and above the value of the gold and silver which would
have circulated in the country, had there been no paper money. It was over
and above, therefore, what the circulation of the country could easily
absorb and employ, and upon that account, immediately returned upon the
banks, in order to be exchanged for gold and silver, which they were to find
as they could. It was a capital which those projectors had very artfully
contrived to draw from those banks, not only without their knowledge or
deliberate consent, but for some time, perhaps, without their having the
most distant suspicion that they had really advanced it.

When two people, who are continually drawing and redrawing upon one another,
discount their bills always with the same banker, he must immediately
discover what they are about, and see clearly that they are trading, not
with any capital of their own, but with the capital which he advances to
them. But this discovery is not altogether so easy when they discount their
bills sometimes with one banker, and sometimes with another, and when the
two same persons do not constantly draw and redraw upon one another, but
occasionally run the round of a great circle of projectors, who find it for
their interest to assist one another in this method of raising money and to
render it, upon that account, as difficult as possible to distinguish
between a real and a fictitious bill of exchange, between a bill drawn by a
real creditor upon a real debtor, and a bill for which there was properly no
real creditor but the bank which discounted it, nor any real debtor but the
projector who made use of the money. When a banker had even made this
discovery, he might sometimes make it too late, and might find that he had
already discounted the bills of those projectors to so great an extent,
that, by refusing to discount any more, he would necessarily make them all
bankrupts ; and thus by ruining them, might perhaps ruin himself. For his
own interest and safety, therefore, he might find it necessary, in this very
perilous situation, to go on for some time, endeavouring, however, to
withdraw gradually, and, upon that account, making every day greater and
greater difficulties about discounting, in order to force these projectors
by degrees to have recourse, either to other bankers, or to other methods of
raising money : so as that he himself might, as soon as possible, get out of
the circle. The difficulties, accordingly, which the Bank of England, which
the principal bankers in London, and which even the more prudent Scotch
banks began, after a certain time, and when all of them had already gone too
far, to make about discounting, not only alarmed, but enraged, in the
highest degree, those projectors. Their own distress, of which this prudent
and necessary reserve of the banks was, no doubt, the immediate occasion,
they called the distress of the country ; and this distress of the country,
they said, was altogether owing to the ignorance, pusillanimity, and bad
conduct of the banks, which did not give a sufficiently liberal aid to the
spirited undertakings of those who exerted themselves in order to beautify,
improve, and enrich the country. It was the duty of the banks, they seemed
to think, to lend for as long a time, and to as great an extent, as they
might wish to borrow. The banks, however, by refusing in this manner to
give more credit to those to whom they had already given a great deal too
much, took the only method by which it was now possible to save either their
own credit, or the public credit of the country.

In the midst of this clamour and distress, a new bank was established in
Scotland, for the express purpose of relieving the distress of the country.
The design was generous ; but the execution was imprudent, and the nature
and causes of the distress which it meant to relieve, were not, perhaps,
well understood. This bank was more liberal than any other had ever been,
both in granting cash-accounts, and in discounting bills of exchange. With
regard to the latter, it seems to have made scarce any distinction between
real and circulating bills, but to have discounted all equally. It was the
avowed principle of this bank to advance upon any reasonable security, the
whole capital which was to be employed in those improvements of which the
returns are the most slow and distant, such as the improvements of land. To
promote such improvements was even said to be the chief of the
public-spirited purposes for which it was instituted. By its liberality in
granting cash-accounts, and in discounting bills of exchange, it, no doubt,
issued great quantities of its bank notes. But those bank notes being, the
greater part of them, over and above what the circulation of the country
could easily absorb and employ, returned upon it, in order to be exchanged
for gold and silver, as fast as they were issued. Its coffers were never
well filled. The capital which had been subscribed to this bank, at two
different subscriptions, amounted to one hundred and sixty thousand pounds,
of which eighty per cent. only was paid up. This sum ought to have been paid
in at several different instalments. A great part of the proprietors, when
they paid in their first instalment, opened a cash-account with the bank;
and the directors, thinking themselves obliged to treat their own
proprietors with the same liberality with which they treated all other men,
allowed many of them to borrow upon this cash-account what they paid in upon
all their subsequent instalments. Such payments, therefore, only put into
one coffer what had the moment before been taken out of another. But had the
coffers of this bank been filled ever so well, its excessive circulation
must have emptied them faster than they could have been replenished by any
other expedient but the ruinous one of drawing upon London; and when the
bill became due, paying it, together with interest and commission, by
another draught upon the same place. Its coffers having been filled so very
ill, it is said to have been driven to this resource within a very few
months after it began to do business. The estates of the proprietors of this
bank were worth several millions, and, by their subscription to the original
bond or contract of the bank, were really pledged for answering all its
engagements. By means of the great credit which so great a pledge
necessarily gave it, it was, notwithstanding its too liberal conduct,
enabled to carry on business for more than two years. When it was obliged to
stop, it had in the circulation about two hundred thousand pounds in bank
notes. In order to support the circulation of those notes, which were
continually returning upon it as fast as they were issued, it had been
constantly in the practice of drawing bills of exchange upon London, of
which the number and value were continually increasing, and. when it stopt,
amounted to upwards of six hundred thousand pounds. This bank, therefore,
had, in little more than the course of two years, advanced to different
people upwards of eight hundred thousand pounds at five per cent. Upon the
two hundred thousand pounds which it circulated in bank notes, this five per
cent. might perhaps be considered as a clear gain, without any other
deduction besides the expense of management. But upon upwards of six hundred
thousand pounds, for which it was continually drawing bills of exchange upon
London, it was paying, in the way of interest and commission, upwards of
eight per cent. and was consequently losing more than three per cent. upon
more than three fourths of all its dealings.

The operations of this bank seem to have produced effects quite opposite to
those which were intended by the particular persons who planned and directed
it. They seem to have intended to support the spirited undertakings, for as
such they considered them, which were at that time carrying on in different
parts of the country ; and, at the same time, by drawing the whole banking
business to themselves, to supplant all the other Scotch banks, particularly
those established at Edinburgh, whose backwardness in discounting bills of
exchange had given some offence. This bank, no doubt, gave some temporary
relief to those projectors, and enabled them to carry on their projects for
about two years longer than they could otherwise have done. But it thereby
only enabled them to get so much deeper into debt ; so that, when ruin came,
it fell so much the heavier both upon them and upon their creditors. The
operations of this bank, therefore, instead of relieving, in reality
aggravated in the long-run the distress which those projectors had brought
both upon themselves and upon their country. It would have been much better
for themselves, their creditors, and their country, had the greater part of
them been obliged to stop two years sooner than they actually did. The
temporary relief, however, which this bank afforded to those projectors,
proved a real and permanent relief to the other Scotch banks. All the
dealers in circulating bills of exchange, which those other banks had become
so backward in discounting, had recourse to this new bank, where they were
received with open arms. Those other banks, therefore, were enabled to get
very easily out of that fatal circle, from which they could not otherwise
have disengaged themselves without incurring a considerable loss, and
perhaps, too, even some degree of discredit.

In the long-run, therefore, the operations of this bank increased the real
distress of the country, which it meant to relieve ; and effectually
relieved, from a very great distress, those rivals whom it meant to
supplant.

At the first setting out of this bank, it was the opinion of some people,
that how fast soever its coffers might be emptied, it might easily replenish
them, by raising money upon the securities of those to whom it had advanced
its paper. Experience, I believe, soon convinced them that this method of
raising money was by much too slow to answer their purpose; and that coffers
which originally were so ill filled, and which emptied themselves so very
fast, could be replenished by no other expedient but the ruinous one of
drawing bills upon London, and when they became due, paying them by other
draughts on the same place, with accumulated interest and commission. But
though they had been able by this method to raise money as fast as they
wanted it, yet, instead of making a profit, they must have suffered a loss
of every such operation ; so that in the long-run they must have ruined
themselves as a mercantile company, though perhaps not so soon as by the
more expensive practice of drawing and redrawing. They could still have made
nothing by the interest of the paper, which, being over and above what the
circulation of the country could absorb and employ, returned upon them in
order to be exchanged for gold and silver, as fast as they issued it ; and
for the payment of which they were themselves continually obliged to borrow
money. On the contrary, the whole expense of this borrowing, of employing
agents to look out for people who had money to lend, of negotiating with
those people, and of drawing the proper bond or assignment, must have fallen
upon them, and have been so much clear loss upon the balance of their
accounts. The project of replenishing their coffers in this manner may be
compared to that of a man who had a water-pond from which a stream was
continually running out, and into which no stream was continually running,
but who proposed to keep it always equally full, by employing a number of
people to go continually with buckets to a well at some miles distance, in
order to bring water to replenish it.

But though this operation had proved not only practicable, but profitable to
the bank, as a mercantile company; yet the country could have derived no
benefit front it, but, on the contrary, must have suffered a very
considerable loss by it. This operation could not augment, in the smallest
degree, the quantity of money to be lent. It could only have erected this
bank into a sort of general loan office for the whole country. Those who
wanted to borrow must have applied to this bank, instead of applying to the
private persons who had lent it their money. But a bank which lends money,
perhaps to five hundred different people, the greater part of whom its
directors can know very little about, is not likely to be more judicious in
the choice of its debtors than a private person who lends out his money
among a few people whom he knows, and in whose sober and frugal conduct he
thinks he has good reason to confide. The debtors of such a bank as that
whose conduct I have been giving some account of were likely, the greater
part of them, to be chimerical projectors, the drawers and redrawers of
circulating bills of exchange, who would employ the money in extravagant
undertakings, which, with all the assistance that could be given them, they
would probably never be able to complete, and which, if they should be
completed, would never repay the expense which they had really cost, would
never afford a fund capable of maintaining a quantity of labour equal to
that which had been employed about them. The sober and frugal debtors of
private persons, on the contrary, would be more likely to employ the money
borrowed in sober undertakings which were proportioned to their capitals,
and which, though they might have less of the grand and the marvellous,
would have more of the solid and the profitable ; which would repay with a
large profit whatever had been laid out upon them, and which would thus
afford a fund capable of maintaining a much greater quantity of labour than
that which had been employed about them. The success of this operation,
therefore, without increasing in the smallest degree the capital of the
country, would only have transferred a great part of it from prudent and
profitable to imprudent and unprofitable undertakings.

That the industry of Scotland languished for want of money to employ it, was
the opinion of the famous Mr Law. By establishing a bank of a particular
kind, which he seems to have imagined might issue paper to the amount of the
whole value of all the lands in the country, he proposed to remedy this want
of money. The parliament of Scotland, when he first proposed his project,
did not think proper to adopt it. It was afterwards adopted, with some
variations, by the Duke of Orleans, at that time regent of France. The idea
of the possibility of multiplying paper money to almost any extent was the
real foundation of what is called the Mississippi scheme, the most
extravagant project, both of banking and stock-jobbing, that perhaps the
world ever saw. The different operations of this scheme are explained so
fully, so clearly, and with so much order and distinctness, by Mr Du Verney,
in his Examination of the Political Reflections upon commerce and finances
of Mr Du Tot, that I shall not give any account of them. The principles upon
which it was founded are explained by Mr Law himself, in a discourse
concerning money and trade, which he published in Scotland when he first
proposed his project. The splendid but visionary ideas which are set forth
in that and some other works upon the same principles, still continue to
make an impression upon many people, and have, perhaps, in part, contributed
to that excess of banking, which has of late been complained of, both in
Scotland and in other places.

The Bank of England is the greatest bank of circulation in Europe. It was
incorporated, in pursuance of an act of parliament, by a charter under the
great seal, dated the 27th of July 1694. It at that time advanced to
government the sum of 1,200,000 for an annuity of 100,000, or for
96,000 a-year, interest at the rate of eight per cent. and 4,000 year for
the expense of management. The credit of the new government, established by
the Revolution, we may believe, must have been very low, when it was obliged
to borrow at so high an interest.

In 1697, the bank was allowed to enlarge its capital stock, by an
ingraftment of 1,001,171:10s. Its whole capital stock, therefore, amounted
at this time to 2,201,171: 10s. This ingraftment is said to have been for
the support of public credit. In 1696, tallies had been at forty, and fifty,
and sixty. per cent. discount, and bank notes at twenty per cent. {James
Postlethwaite's History of the Public Revenue, p.301.} During the great
re-coinage of the silver, which was going on at this time, the bank had
thought proper to discontinue the payment of its notes, which necessarily
occasioned their discredit.

In pursuance of the 7th Anne, c. 7, the bank advanced and paid into the
exchequer the sum of 400,000; making in all the sum of 1,600,000, which
it had advanced upon its original annuity of 96,000 interest, and 4,000
for expense of management. In 1708, therefore, the credit of government was
as good as that of private persons, since it could borrow at six per cent.
interest, the common legal and market rate of those times. In pursuance of
the same act, the bank cancelled exchequer bills to the amount of
1,775,027: 17s: 10d. at six per cent. interest, and was at the same time
allowed to take in subscriptions for doubling its capital. In 1703,
therefore, the capital of the bank amounted to 4,402,343 ; and it had
advanced to government the sum of 3,375,027:17:10d.

By a call of fifteen per cent. in 1709, there was paid in, and made stock,
656,204:1:9d.; and by another of ten per cent. in 1710, 501,448:12:11d. In
consequence of those two calls, therefore, the bank capital amounted to
5,559,995:14:8d.

In pursuance of the 3rd George I. c.8, the bank delivered up two millions of
exchequer Bills to be cancelled. It had at this time, therefore, advanced to
government 5,375,027:17 10d. In pursuance of the 8th George I. c.21, the
bank purchased of the South-sea company, stock to the amount of 4,000,000:
and in 1722, in consequence of the subscriptions which it had taken in for
enabling it to make this purchase, its capital stock was increased by
3,400,000. At this time, therefore, the bank had advanced to the public
9,375,027 17s. 10d.; and its capital stock amounted only to
8,959,995:14:8d. It was upon this occasion that the sum which the bank had
advanced to the public, and for which it received interest, began first to
exceed its capital stock, or the sum for which it paid a dividend to the
proprietors of bank stock ; or, in other words, that the bank began to have
an undivided capital, over and above its divided one. It has continued to
have an undivided capital of the same kind ever since. In 1746, the bank
had, upon different occasions, advanced to the public 11,686,800, and its
divided capital had been raised by different calls and subscriptions to
10,780,000. The state of those two sums has continued to be the same ever
since. In pursuance of the 4th of George III. c.25, the bank agreed to pay
to government for the renewal of its charter 110,000, without interest or
re-payment. This sum, therefore did not increase either of those two other
sums.

The dividend of the bank has varied according to the variations in the rate
of the interest which it has, at different times, received for the money it
had advanced to the public, as well as according to other circumstances.
This rate of interest has gradually been reduced from eight to three per
cent. For some years past, the bank dividend has been at five and a half per
cent.

The stability of the bank of England is equal to that of the British
government. All that it has advanced to the public must be lost before its
creditors can sustain any loss. No other banking company in England can be
established by act of parliament, or can consist of more than six members.
It acts, not only as an ordinary bank, but as a great engine of state. It
receives and pays the greater part of the annuities which are due to the
creditors of the public ; it circulates exchequer bills ; and it advances to
government the annual amount of the land and malt taxes, which are
frequently not paid up till some years thereafter. In these different
operations, its duty to the public may sometimes have obliged it, without
any fault of its directors, to overstock the circulation with paper money.
It likewise discounts merchants' bills, and has, upon several different
occasions, supported the credit of the principal houses, not only of
England, but of Hamburgh and Holland. Upon one occasion, in 1763, it is said
to have advanced for this purpose, in one week, about 1,600,000, a great
part of it in bullion. I do not, however, pretend to warrant either the
greatness of the sum, or the shortness of the time. Upon other occasions,
this great company has been reduced to the necessity of paying in sixpences.

It is not by augmenting the capital of the country, but by rendering a
greater part of that capital active and productive than would otherwise be
so, that the most judicious operations of banking can increase the industry
of the country. That part of his capital which a dealer is obliged to keep
by him unemployed and in ready money, for answering occasional demands, is
so much dead stock, which, so long as it remains in this situation, produces
nothing, either to him or to his country. The judicious operations of
banking enable him to convert this dead stock into active and productive
stock ; into materials to work upon ; into tools to work with ; and into
provisions and subsistence to work for ; into stock which produces something
both to himself and to his country. The gold and silver money which
circulates in any country, and by means of which, the produce of its land
and labour is annually circulated and distributed to the proper consumers,
is, in the same manner as the ready money of the dealer, all dead stock. It
is a very valuable part of the capital of the country, which produces
nothing to the country. The judicious operations of banking, by substituting
paper in the room of a great part of this gold and silver, enable the
country to convert a great part of this dead stock into active and
productive stock; into stock which produces something to the country. The
gold and silver money which circulates in any country may very properly be
compared to a highway, which, while it circulates and carries to market all
the grass and corn of the country, produces itself not a single pile of
either. The judicious operations of banking, by providing, if I may be
allowed so violent a metaphor, a sort of waggon-way through the air, enable
the country to convert, as it were, a great part of its highways into good
pastures, and corn fields, and thereby to increase, very considerably, the
annual produce of its land and labour. The commerce and industry of the
country, however, it must be acknowledged, though they may be somewhat
augmented, cannot be altogether so secure, when they are thus, as it were,
suspended upon the Daedalian wings of paper money, as when they travel about
upon the solid ground of gold and silver. Over and above the accidents to
which they are exposed from the unskilfulness of the conductors of this
paper money, they are liable to several others, from which no prudence or
skill of those conductors can guard them.

An unsuccessful war, for example, in which the enemy got possession of the
capital, and consequently of that treasure which supported the credit of the
paper money, would occasion a much greater confusion in a country where the
whole circulation was carried on by paper, than in one where the greater
part of it was carried on by gold and silver. The usual instrument of
commerce having lost its value, no exchanges could be made but either by
barter or upon credit. All taxes having been usually paid in paper money,
the prince would not have wherewithal either to pay his troops, or to
furnish his magazines; and the state of the country would be much more
irretrievable than if the greater part of its circulation had consisted in
gold and silver. A prince, anxious to maintain his dominions at all times in
the state in which he can most easily defend them, ought upon this account
to guard not only against that excessive multiplication of paper money which
ruins the very banks which issue it, but even against that multiplication of
it which enables them to fill the greater part of the circulation of the
country with it.

The circulation of every country may be considered as divided into two
different branches; the circulation of the dealers with one another, and the
circulation between the dealers and the consumers. Though the same pieces of
money, whether paper or metal, may be employed sometimes in the one
circulation and sometimes in the other; yet as both are constantly going on
at the same time, each requires a certain stock of money, of one kind or
another, to carry it on. The value of the goods circulated between the
different dealers never can exceed the value of those circulated between the
dealers and the consumers ; whatever is bought by the dealers being
ultimately destined to be sold to the consumers. The circulation between the
dealers, as it is carried on by wholesale, requires generally a pretty large
sum for every particular transaction. That between the dealers and the
consumers, on the contrary, as it is generally carried on by retail,
frequently requires but very small ones, a shilling, or even a halfpenny,
being often sufficient. But small sums circulate much faster than large
ones. A shilling changes masters more frequently than a guinea, and a
halfpenny more frequently than a shilling. Though the annual purchases of
all the consumers, therefore, are at least equal in value to those of all
the dealers, they can generally be transacted with a much smaller quantity
of money ; the same pieces, by a more rapid circulation, serving as the
instrument of many more purchases of the one kind than of the other.

Paper money may be so regulated as either to confine itself very much to the
circulation between the different dealers, or to extend itself likewise to a
great part of that between the dealers and the consumers. Where no bank
notes are circulated under 10 value, as in London, paper money confines
itself very much to the circulation between the dealers. When a ten pound
bank note comes into the hands of a consumer, he is generally obliged to
change it at the first shop where he has occasion to purchase five shillings
worth of goods; so that it often returns into the hands of a dealer before
the consumer has spent the fortieth part of the money. Where bank notes are
issued for so small sums as 20s. as in Scotland, paper money extends itself
to a considerable part of the circulation between dealers and consumers.
Before the Act of parliament which put a stop to the circulation of ten and
five shilling notes, it filled a still greater part of that circulation. In
the currencies of North America, paper was commonly issued for so small a
sum as a shilling, and filled almost the whole of that circulation. In some
paper currencies of Yorkshire, it was issued even for so small a sum as a
sixpence.

Where the issuing of bank notes for such very small sums is allowed, and
commonly practised, many mean people are both enabled and encouraged to
become bankers. A person whose promissory note for 5, or even for 20s.
would be rejected by every body, will get it to be received without scruple
when it is issued for so small a sum as a sixpence. But the frequent
bankruptcies to which such beggarly bankers must be liable, may occasion a
very considerable inconveniency, and sometimes even a very great calamity,
to many poor people who had received their notes in payment.

It were better, perhaps, that no bank notes were issued in any part of the
kingdom for a smaller sum than 5. Paper money would then, probably, confine
itself, in every part of the kingdom, to the circulation between the
different dealers, as much as it does at present in London, where no bank
notes are issued under 10 value ; 5 being, in most part of the kingdom,
a sum which, though it will purchase, perhaps, little more than half the
quantity of goods, is as much considered, and is as seldom spent all at
once, as 10 are amidst the profuse expense of London.

Where paper money, it is to be observed, is pretty much confined to the
circulation between dealers and dealers, as at London, there is always
plenty of gold and silver. Where it extends itself to a considerable part of
the circulation between dealers and consumers, as in Scotland, and still
more in North America, it banishes gold and silver almost entirely from the
country ; almost all the ordinary transactions of its interior commerce
being thus carried on by paper. The suppression of ten and five shilling
bank notes, somewhat relieved the scarcity of gold and. silver in Scotland;
and the suppression of twenty shilling notes will probably relieve it still
more. Those metals are said to have become more abundant in America, since
the suppression of some of their paper currencies. They are said, likewise,
to have been more abundant before the institution of those currencies.

Though paper money should be pretty much confined to the circulation between
dealers and dealers, yet banks and bankers might still be able to give
nearly the same assistance to the industry and commerce of the country, as
they had done when paper money filled almost the whole circulation. The
ready money which a dealer is obliged to keep by him, for answering
occasional demands, is destined altogether for the circulation between
himself and other dealers of whom he buys goods. He has no occasion to keep
any by him for the circulation between himself and the consumers, who are
his customers, and who bring ready money to him, instead of taking any from
him. Though no paper money, therefore, was allowed to be issued, but for
such sums as would confine it pretty much to the circulation between dealers
and dealers; yet partly by discounting real bills of exchange, and partly by
lending upon cash-accounts, banks and bankers might still be able to relieve
the greater part of those dealers from the necessity of keeping any
considerable part of their stock by them unemployed, and in ready money, for
answering occasional demands. They might still be able to give the utmost
assistance which banks and bankers can with propriety give to traders of
every kind.

To restrain private people, it may be said, from receiving in payment the
promissory notes of a banker for any sum, whether great or small, when they
themselves are willing to receive them; or, to restrain a banker from
issuing such notes, when all his neighbours are willing to accept of them,
is a manifest violation of that natural liberty, which it is the proper
business of law not to infringe, but to support. Such regulations may, no
doubt, be considered as in some respect a violation of natural liberty. But
those exertions of the natural liberty of a few individuals, which might
endanger the security of the whole society, are, and ought to be, restrained
by the laws of all governments ; of the most free, as well as or the most
despotical. The obligation of building party walls, in order to prevent the
communication of fire, is a violation of natural liberty, exactly of the
same kind with the regulations of the banking trade which are here proposed.

A paper money, consisting in bank notes, issued by people of undoubted
credit, payable upon demand, without any condition, and, in fact, always
readily paid as soon as presented, is, in every respect, equal in value to
gold and silver money, since gold and silver money can at anytime be had for
it. Whatever is either bought or sold for such paper, must necessarily be
bought or sold as cheap as it could have been for gold and silver.

The increase of paper money, it has been said, by augmenting the quantity,
and consequently diminishing the value, of the whole currency, necessarily
augments the money price of commodities. But as the quantity of gold and
silver, which is taken from the currency, is always equal to the quantity of
paper which is added to it, paper money does not necessarily increase the
quantity of the whole currency. From the beginning of the last century to
the present time, provisions never were cheaper in Scotland than in 1759,
though, from the circulation of ten and five shilling bank notes, there was
then more paper money in the country than at present. The proportion
between the price of provisions in Scotland and that in England is the same
now as before the great multiplication of banking companies in Scotland.
Corn is, upon most occasions, fully as cheap in England as in France, though
there is a great deal of paper money in England, and scarce any in France.
In 1751 and 1752, when Mr Hume published his Political Discourses, and soon
after the great multiplication of paper money in Scotland, there was a very
sensible rise in the price of provisions, owing, probably, to the badness of
the seasons, and not to the multiplication of paper money.

It would be otherwise, indeed, with a paper money, consisting in promissory
notes, of which the immediate payment depended, in any respect, either upon
the good will of those who issued them, or upon a condition which the holder
of the notes might not always have it in his power to fulfil, or of which
the payment was not exigible till after a certain number of years, and
which, in the mean time, bore no interest. Such a paper money would, no
doubt, fall more or less below the value of gold and silver, according as
the difficulty or uncertainty of obtaining immediate payment was supposed to
be greater or less, or according to the greater or less distance of time at
which payment was exigible.

Some years ago the different banking companies of Scotland were in the
practice of inserting into their bank notes, what they called an optional
clause; by which they promised payment to the bearer, either as soon as the
note should be presented, or, in the option of the directors, six months
after such presentment, together with the legal interest for the said six
months. The directors of some of those banks sometimes took advantage of
this optional clause, and sometimes threatened those who demanded gold and
silver in exchange for a considerable number of their notes, that they would
take advantage of it, unless such demanders would content themselves with a
part of what they demanded. The promissory notes of those banking companies
constituted, at that time, the far greater part of the currency of Scotland,
which this uncertainty of payment necessarily degraded below value of gold
and silver money. During the continuance of this abuse (which prevailed
chiefly in 1762, 1763, and 1764), while the exchange between London and
Carlisle was at par, that between London and Dumfries would sometimes be
four per cent. against Dumfries, though this town is not thirty miles
distant from Carlisle. But at Carlisle, bills were paid in gold and
silver ; whereas at Dumfries they were paid in Scotch bank notes ; and the
uncertainty of getting these bank notes exchanged for gold and silver coin,
had thus degraded them four per cent. below the value of that coin. The same
act of parliament which suppressed ten and five shilling bank notes,
suppressed likewise this optional clause, and thereby restored the exchange
between England and Scotland to its natural rate, or to what the course of
trade and remittances might happen to make it.

In the paper currencies of Yorkshire, the payment of so small a sum as 6d.
sometimes depended upon the condition, that the holder of the note should
bring the change of a guinea to the person who issued it; a condition which
the holders of such notes might frequently find it very difficult to fulfil,
and which must have degraded this currency below the value of gold and
silver money. An act of parliament, accordingly, declared all such clauses
unlawful, and suppressed, in the same manner as in Scotland, all promissory
notes, payable to the bearer, under 20s. value.

The paper currencies of North America consisted, not in bank notes payable
to the bearer on demand, but in a government paper, of which the payment was
not exigible till several years after it was issued ; and though the colony
governments paid no interest to the holders of this paper, they declared it
to be, and in fact rendered it, a legal tender of payment for the full value
for which it was issued. But allowing the colony security to be perfectly
good, 100, payable fifteen years hence, for example, in a country where
interest is at six per cent., is worth little more than 40 ready money. ,
To oblige a creditor, therefore, to accept of this as full payment for a
debt of 100, actually paid down in ready money, was an act of such violent
injustice, as has scarce, perhaps, been attempted by the government of any
other country which pretended to be free. It bears the evident marks of
having originally been, what the honest and downright Doctor Douglas assures
us it was, a scheme of fraudulent debtors to cheat their creditors. The
government of Pennsylvania, indeed, pretended, upon their first emission of
paper money, in 1722, to render their paper of equal value with gold and
silver, by enacting penalties against all those who made any difference in
the price of their goods when they sold them for a colony paper, and when
they sold them for gold and silver, a regulation equally tyrannical, but
much less, effectual, than that which it was meant to support. A positive
law may render a shilling a legal tender for a guinea, because it may direct
the courts of justice to discharge the debtor who has made that tender ; but
no positive law can oblige a person who sells goods, and who is at liberty
to sell or not to sell as he pleases, to accept of a shilling as equivalent
to a guinea in the price of them. Notwithstanding any regulation of this
kind, it appeared, by the course of exchange with Great Britain, that 100
sterling was occasionally considered as equivalent, in some of the colonies,
to 130, and in others to so great a sum as 1100 currency ; this difference
in the value arising from the difference in the quantity of paper emitted in
the different colonies, and in the distance and probability of the term of
its final discharge and redemption.

No law, therefore, could be more equitable than the act of parliament, so
unjustly complained of in the colonies, which declared, that no paper
currency to be emitted there in time coming, should be a legal tender of
payment.

Pennsylvania was always more moderate in its emissions of paper money than
any other of our colonies. Its paper currency, accordingly, is said never to
have sunk below the value of the gold and silver which was current in the
colony before the first emission of its paper money. Before that emission,
the colony had raised the denomination of its coin, and had, by act of
assembly, ordered 5s. sterling to pass in the colonies for 6s:3d., and
afterwards for 6s:8d. A pound, colony currency, therefore, even when that
currency was gold and silver, was more than thirty per cent. below the value
of 1 sterling; and when that currency was turned into paper, it was seldom
much more than thirty per cent. below that value. The pretence for raising
the denomination of the coin was to prevent the exportation of gold and
silver, by making equal quantities of those metals pass for greater sums in
the colony than they did in the mother country. It was found, however, that
the price of all goods from the mother country rose exactly in proportion as
they raised the denomination of their coin, so that their gold and silver
were exported as fast as ever.

The paper of each colony being received in the payment of the provincial
taxes, for the full value for which it had been issued, it necessarily
derived from this use some additional value, over and above what it would
have had, from the real or supposed distance of the term of its final
discharge and redemption. This additional value was greater or less,
according as the quantity of paper issued was more or less above what could
be employed in the payment of the taxes of the particular colony which
issued it. It was in all the colonies very much above what could be employed
in this manner.

A prince, who should enact that a certain proportion of his taxes should be
paid in a paper money of a certain kind, might thereby . give a certain
value to this paper money, even though the term of its final discharge and
redemption should depend altogether upon the will of the prince. If the bank
which issued this paper was careful to keep the quantity of it always
somewhat below what could easily be employed in this manner, the demand for
it might be such as to make it even bear a premium, or sell for somewhat more
in the market than the quantity of gold or silver currency for which it
was issued. Some people account in this manner for what is called the agio
of the bank of Amsterdam, or for the superiority of bank money over
current money, though this bank money, as they pretend, cannot be taken
out of the bank at the will of the owner. The greater part of foreign bills
of exchange must be paid in bank money, that is, by a transfer in the
books of the bank ; and the directors of the bank, they allege, are
careful to keep the whole quantity of bank money always below what this
use occasions a demand for. It is upon this account, they say, the bank
money sells for a premium, or bears an agio of four or five per cent. above
the same nominal sum of the gold and silver currency of the country. This
account of the bank of Amsterdam, however, it will appear hereafter, is in a
great measure chimerical.

A paper currency which falls below the value of gold and silver coin, does
not thereby sink the value of those metals, or occasion equal quantities of
them to exchange for a smaller quantity of goods of any other kind. The
proportion between the value of gold and silver and that of goods of any
other kind, depends in all cases, not upon the nature and quantity of any
particular paper money, which may be current in any particular country, but
upon the richness or poverty of the mines, which happen at any particular
time to supply the great market of the commercial world with those metals.
It depends upon the proportion between the quantity of labour which is
necessary in order to bring a certain quantity of gold and silver to market,
and that which is necessary in order to bring thither a certain quantity of
any other sort of goods.

If bankers are restrained from issuing any circulating bank notes, or notes
payable to the bearer, for less than a certain sum; and if they are
subjected to the obligation of an immediate and unconditional payment of
such bank notes as soon as presented, their trade may, with safety to the
public, be rendered in all other respects perfectly free. The late
multiplication of banking companies in both parts of the united kingdom, an
event by which many people have been much alarmed, instead of diminishing,
increases the security of the public. It obliges all of them to be more
circumspect in their conduct, and, by not extending their currency beyond
its due proportion to their cash, to guard themselves against those
malicious runs, which the rivalship of so many competitors is always ready
to bring upon them. It restrains the circulation of each particular company
within a narrower circle, and reduces their circulating notes to a smaller
number. By dividing the whole circulation into a greater number of parts,
the failure of any one company, an accident which, in the course of things,
must sometimes happen, becomes of less consequence to the public. This free
competition, too, obliges all bankers to be more liberal in their dealings
with their customers, lest their rivals should carry them away. In general,
if any branch of trade, or any division of labour, be advantageous to the
public, the freer and more general the competition, it will always be the
more so.


Adam Smith

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