Chapter II (3)

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

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

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

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

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

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

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

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

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

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