431. If you take a baby in your arms for the first time, and at the same time wish, you will get your wish before the year is out. Quebec. 432. Take your Bible and wish. If it opens at and it came to pass, you will get your wish... Read more of Wishes at Superstitions.caInformational Site Network Informational
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Of Money Considered As A Particular Branch Of The General Stock Of The Society








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 the same kind should, at the same time, be
carried on by many different banks and bankers, the whole circulation
may thus be conducted with a fifth part only of the gold and silver
which would otherwise have been requisite.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The trader A in Edinburgh, we shall suppose, draws a bill upon B in
London, payable two months after date. In reality B in London owes
nothing to A in Edinburgh; but he agrees to accept of A 's bill, upon
condition, that before the term of payment he shall redraw upon A in
Edinburgh for the same sum, together with the interest and a commission,
another bill, payable likewise two months after date. B accordingly,
before the expiration of the first two months, redraws this bill upon A
in Edinburgh; who, again before the expiration of the second two months,
draws a second bill upon B in London, payable likewise two months after
date; and before the expiration of the third two months, B in London
redraws upon A in Edinburgh another bill payable also two months after
date. This practice has sometimes gone on, not only for several months,
but for several years together, the bill always returning upon A in
Edinburgh with the accumulated interest and commission of all the former
bills. The interest was five per cent. in the year, and the commission
was never less than one half per cent. on each draught. This commission
being repeated





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