Chapter II (1)

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 be 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
ascertain 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 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 may 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 (in consequence 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 ½ 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.