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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