Chapter II (2)

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 a-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: 10½d. 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 £3,375,027:17:10½d.

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. 10½d.; 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.