Money as Part of Society's Wealth, or the Cost of Maintaining National Capital

It has been shown in the First Book, that the price of the greater part of commodities resolves itself into three parts, of which one pays the wages of the labour, another the profits of the stock, and a third the rent of the land which had been employed in producing and bringing them to market: that there are, indeed, some commodities of which the price is made up of two of those parts only, the wages of labour, and the profits of stock; and a very few in which it consists altogether in one, the wages of labour; but that the price of every commodity necessarily resolves itself into some one or other, or all, of those three parts; every part of it which goes neither to rent nor to wages, being necessarily profit to some body.

The First Book showed that the price of most goods can be divided into three parts. One part pays the wages of the workers. Another pays the profits on the capital used. A third pays the rent for the land used to produce the goods and bring them to market. Some goods, however, have prices made up of only two parts: wages and profits on capital. And the price of a very few goods consists entirely of wages. But the price of every good must consist of one or more of these three parts. Any part that does not go to rent or wages must be profit for someone.

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.

Since this is true of each commodity taken separately, it must also be true of all commodities taken together. These commodities make up the total annual produce of each country's land and labor. The total price or exchange value of that produce must be divided into the same three parts. It must be distributed among the country's inhabitants as wages for their labor, profits from their capital, or rent from 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 entire value of what a country's land and labor produce each year is divided among its inhabitants and provides them with income. But we distinguish between the gross rent and the net rent of a private estate. We can make the same distinction in the income 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 rent of a private estate includes everything the tenant farmer pays. The net rent is what the landlord has left after paying for management, repairs, and all other necessary expenses. It is what the landlord can set aside for immediate consumption without harming the estate. He can spend it on food, carriages, household decorations and furniture, personal pleasures, and amusements. His real wealth depends on his net rent, not his gross 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 gross revenue of all the inhabitants of a great country includes everything their land and labor produce each year. Their net revenue is what remains after deducting the cost of maintaining their fixed capital and then their circulating capital. It is what they can set aside for immediate consumption, or spend on necessities, comforts, and entertainment, without reducing their capital. Their real wealth, too, is measured by their net revenue, not their gross 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 entire cost of maintaining fixed capital must clearly be excluded from society’s net revenue. The materials needed to maintain useful machines, tools of trade, profitable buildings, and so on cannot form part of it. Nor can the products of the labor needed to shape those materials for use. The payment for that labor may, however, form part of net revenue. The workers employed may put the full value of their wages into their stock reserved for immediate consumption. But in other kinds of labor, both the payment and the products go into that stock. The payment goes into the workers’ stock. The products go into the stock of other people, whose necessities, comforts, and pleasures are increased by the workers’ labor.

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 purpose of fixed capital is to increase the productive power of labor. It enables the same number of workers to do much more work. On a farm, the necessary buildings, fences, drains, roads, and other facilities may all be in perfect order. The same number of workers and draft animals will then produce much more than on a less well-equipped farm of equal size and equally good soil. In manufacturing, the same number of workers can produce much more with the best machinery than with inferior equipment. Money properly spent on fixed capital of any kind always pays for itself with a large profit. It increases annual output by much more than the value of what is needed to maintain the improvements. But maintenance still requires a certain share of that output. Some materials and workers are diverted to this other task. They might otherwise have been used directly to increase society’s supply of food, clothing, housing, and other necessities and comforts. Maintaining improvements is indeed highly advantageous, but it is still a different task. For this reason, all mechanical improvements that let the same number of workers do the same amount of work with cheaper, simpler machinery than before are always considered advantageous to every society. Some materials and workers were previously needed to maintain the more complex and expensive machinery. They can now be used to increase the amount of work that this or any other machinery is useful only for performing. Suppose the owner of a large factory spends a thousand a year maintaining its machinery. If he can reduce this expense to five hundred, he will naturally spend the other five hundred on additional materials. He will also hire more workers to make the materials into goods. The amount of work that the machinery was useful only for performing will naturally increase. So will all the benefits and conveniences that society can gain 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.

The cost of maintaining a great country’s fixed capital can properly be compared to the cost of repairs on a private estate. Repairs may often be necessary to maintain the estate’s output and, therefore, the landlord’s gross and net rent. But better management may reduce repair costs without reducing output. In that case, gross rent remains at least as high as before, and net rent necessarily increases.

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 entire cost of maintaining fixed capital must be excluded from society’s net revenue. But the same is not true of the cost of maintaining circulating capital. As already noted, circulating capital has four parts: money, provisions, materials, and finished goods. The last three are regularly withdrawn and placed either in society’s fixed capital or in its stock reserved for immediate consumption. All the consumable goods not used to maintain fixed capital go into the stock reserved for immediate consumption. They become part of society’s net revenue. Maintaining these three parts of circulating capital therefore takes nothing from society’s annual production that would otherwise go to its net revenue, except what is needed to maintain 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.

A society’s circulating capital differs from an individual’s in this respect. None of an individual’s circulating capital forms part of their net revenue. That revenue must consist entirely of profits. Every individual’s circulating capital forms part of the circulating capital of their society. But it is not therefore entirely excluded from the society’s net revenue. The goods in a merchant’s shop cannot be counted as part of the merchant’s own stock reserved for immediate consumption. But they may form part of other people’s stock for immediate consumption. Those people may use revenue from other sources to regularly repay the merchant for the goods, including a profit. They can do this without reducing either the merchant’s capital or their own.

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.

Therefore, money is the only part of a society's circulating capital whose maintenance can reduce its net 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.

Fixed capital and the money in circulating capital are very similar in how they affect society’s income.

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.

First, machines and tools used in trade cost money to build and then to maintain. Both expenses are part of society’s gross revenue, but they are deducted from its net revenue. Similarly, a country’s circulating money costs something to collect and then to maintain. Both expenses are part of gross revenue, but they too are deducted from society’s net revenue. Valuable materials, such as gold and silver, and highly skilled labor are used to maintain this great but expensive instrument of commerce. They are used for this purpose instead of increasing the stock reserved for immediate consumption, which provides individuals with necessities, comforts, and amusements. Yet it is through this instrument that every person in society regularly receives the proper share of those necessities, comforts, and amusements.

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.

Second, machines and tools of trade, among other things, make up the fixed capital of an individual or a society. They are not part of either gross or net revenue. Likewise, money is not itself part of a society's revenue. Money is the means by which that revenue is regularly distributed among all the society's members. The great wheel of circulation is entirely different from the goods it circulates. A society's revenue consists entirely of those goods, not the wheel that circulates them. To calculate either the gross or net revenue of any society, we must deduct the entire value of the money from the total annual circulation of money and goods. Not a single penny of that money can ever form part of either gross or net revenue.

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.

Only the ambiguity of language can make this claim seem 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 we speak of a particular sum of money, we sometimes mean only the coins that make it up. At other times, we also have a vague idea of the goods that can be exchanged for it, or the purchasing power that comes with owning it. For example, when we say that England’s circulating money has been estimated at eighteen million pounds, we mean only the value of the coins that some writers have estimated, or rather supposed, to be circulating in that country. But when we say that a man is worth fifty or a hundred pounds a year, we usually mean more than the amount paid to him in coins each year. We also mean the value of the goods he can buy or consume each year. We usually mean to establish what his way of life is or ought to be. That is, we mean the quantity and quality of life’s necessities and comforts that he can properly enjoy.

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.

A sum of money can refer not only to the amount of metal in the coins that make it up. It can also suggest, vaguely, the goods that can be bought with those coins. In this case, the same word refers somewhat ambiguously to two values. The wealth or income it denotes is equal to only one of them. More properly, it is equal to what the money can buy, rather than to the money itself.

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.

Suppose a person receives a weekly pension of one guinea. During the week, he can use it to buy a certain amount of necessities, comforts, and entertainment. The more or less he can buy, the greater or smaller his real wealth, or real weekly income. His weekly income is certainly not equal to both the guinea and what it can buy. It is equal to only one of those two equal values. More properly, it is equal to what the guinea can buy rather than to the guinea itself.

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.

Suppose such a person received his pension not in gold, but in a weekly bill for a guinea. His income would surely consist less in the paper itself than in what he could get for it. A guinea may be seen as a bill for a certain quantity of necessities and comforts from all the tradesmen in the neighborhood. The income of the person who receives it consists less in the piece of gold than in what he can exchange it for. If he could exchange it for nothing, it would be like a bill drawn on a bankrupt person. It would be worth no more 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.

Similarly, the weekly or yearly income of all the people in a country may be paid to them in money. In fact, it often is. But their real wealth, their total weekly or yearly income, depends on how many consumable goods they can buy with that money. Their total income is clearly not equal to the value of both the money and the consumable goods. It is equal to only one or the other, and more properly to the value of the goods.

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.

We often express a person’s income in terms of the coins paid to them each year. This is because the number of coins determines how much they can buy, or the value of the goods they can afford to consume each year. We still think of income as the power to buy or consume, not as the coins that provide that power.

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.

But if this is clear enough for an individual, it is even clearer for a society. The value of the coins paid to an individual each year is often exactly equal to his income. For that reason, it is the shortest and best way to express the value of his income. But the value of the coins circulating in a society can never equal the income of all its members. The same guinea may pay one man's weekly allowance today, another's tomorrow, and a third man's the day after. So the value of the coins circulating in a country each year must always be much less than the total value of all the money allowances paid with them that year. But those allowances give their recipients purchasing power. The goods that can be bought with them, as they are paid out one after another, must always have exactly the same value as the allowances. The same is true of the income of the people who receive them. That income, therefore, cannot consist of the coins, whose total value is so much less than the value of the income. Instead, it consists of purchasing power, in the goods that can be bought with the coins as they pass 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.

Money is therefore the great wheel of circulation and the great instrument of commerce. Like all other tools of trade, it is a valuable part of a society’s capital. But it is no part of that society’s income. As metal coins circulate each year, they distribute to every person the income that properly belongs to them. Yet the coins themselves are no part of that income.

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.

Thirdly and lastly, the machines and tools of a trade, and other items that make up fixed capital, resemble money in another way. Money is a part of circulating capital. Any saving in the cost of building and maintaining machines improves society’s net revenue, provided it does not reduce labor’s productive power. In exactly the same way, any saving in the cost of collecting and maintaining money improves society’s net revenue.

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.

It is clear how every saving in the cost of maintaining fixed capital improves a society’s net revenue. This has already been partly explained. The total capital of anyone undertaking a business is necessarily divided between fixed and circulating capital. As long as the total remains the same, the smaller one part is, the larger the other must be. Circulating capital provides materials and pays workers, putting industry in motion. Therefore, every saving in the cost of maintaining fixed capital must increase the funds that put industry in motion. This is true as long as the saving does not reduce the productive power of labor. It must consequently increase the annual produce of land and labor, which is 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.

Replacing gold and silver money with paper replaces a very expensive instrument of commerce with a much cheaper one. Paper money is sometimes equally convenient. Circulation is carried on by a new wheel, which costs less to build and maintain than the old one. But how this replacement works is not entirely obvious. Nor is it entirely obvious how it tends to increase society’s gross or net revenue. Both points may therefore need further explanation.

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.

There are several kinds of paper money. But notes issued by banks and bankers are the best known and seem best suited to 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.

Suppose people in a country trust a particular banker’s wealth, honesty, and good judgment. They believe the banker is always ready to pay, on demand, the promissory notes likely to be presented for payment. Those notes then circulate like gold and silver money, because people trust that they can exchange them for gold and silver at any time.

A particular banker lends among his customers his own promissory notes, to the extent, we shall suppose, of a hundred thousand pounds. As those notes serve all the purposes of money, his debtors pay him the same interest as if he had lent them so much money. This interest is the source of his gain. Though some of those notes are continually coming back upon him for payment, part of them continue to circulate for months and years together. Though he has generally in circulation, therefore, notes to the extent of a hundred thousand pounds, twenty thousand pounds in gold and silver may, frequently, be a sufficient provision for answering occasional demands. By this operation, therefore, twenty thousand pounds in gold and silver perform all the functions which a hundred thousand could otherwise have performed. The same exchanges may be made, the same quantity of consumable goods may be circulated and distributed to their proper consumers, by means of his promissory notes, to the value of a hundred thousand pounds, as by an equal value of gold and silver money. Eighty thousand pounds of gold and silver, therefore, can in this manner be spared from the circulation of the country; and if different operations of the same kind should, at the same time, be carried on by many different banks and bankers, the whole circulation may thus be conducted with a fifth part only of the gold and silver which would otherwise have been requisite.

Suppose a banker lends his customers £100,000 in his own promissory notes. These notes serve every purpose of money, so his borrowers pay him the same interest as if he had lent them money. This interest is the source of his profit. Some notes are continually returned to him for payment, but others remain in circulation for months or even years. So although he generally has £100,000 in notes circulating, £20,000 in gold and silver may often be enough to meet occasional demands. In this way, £20,000 in gold and silver performs all the functions that £100,000 could otherwise have performed. His £100,000 in promissory notes can make the same exchanges as £100,000 in gold and silver money. The notes can also circulate the same quantity of consumable goods and distribute them to their proper consumers. In this way, £80,000 in gold and silver can be spared from circulation in the country. If many banks and bankers carry out similar operations at the same time, all circulation may be conducted with just one-fifth of the gold and silver otherwise required.

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.

Suppose, for example, that a country’s circulating money at a particular time amounts to one million pounds sterling. That sum is enough to circulate the entire annual produce of its land and labour. Suppose, too, that sometime later, banks and bankers issue one million pounds in notes payable to whoever holds them. They keep two hundred thousand pounds in their vaults to meet occasional demands for payment. There would then be eight hundred thousand pounds in gold and silver in circulation, along with a million pounds in banknotes. Together, the paper and metal money would amount to eighteen hundred thousand pounds. But the country’s annual produce had previously required only one million pounds to circulate and distribute it to its proper consumers. These banking operations cannot immediately increase that annual produce. So one million pounds will still be enough to circulate it. The goods to be bought and sold are exactly the same as before. The same amount of money will therefore be enough to buy and sell them. If I may use the expression, the channel of circulation will remain exactly the same as before. We have supposed that one million pounds is enough to fill that channel. Anything poured in beyond that amount cannot enter the channel and must overflow. Eighteen hundred thousand pounds are poured in. Eight hundred thousand pounds must therefore overflow, since it exceeds what can be used in the country’s circulation. But although this sum cannot be used at home, it is too valuable to be left idle. It will therefore be sent abroad to find the profitable use it cannot find at home. But the paper money cannot go abroad. Far from the banks that issue it and the country where payment can be legally demanded, it will not be accepted in ordinary payments. Gold and silver worth eight hundred thousand pounds will therefore be sent abroad. The channel of circulation at home will remain filled with a million pounds in paper money, instead of the million pounds in gold and silver that 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.

But although so much gold and silver is sent abroad, we should not think it is sent for nothing. Nor do its owners give it away to foreign nations. They exchange it for foreign goods of one kind or another. These goods are meant for consumption either in another foreign country or in 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 use it to buy goods in one foreign country for consumption in another, they are engaging in the carrying trade. Whatever profit they make will add to their own country's net revenue. It is like a new fund created to carry on a new trade. Domestic business is now conducted using paper money, while the gold and silver have been 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.

If they use it to buy foreign goods for consumption at home, they have two options. First, they may buy goods likely to be consumed by idle people who produce nothing, such as foreign wines and silks. Second, they may buy additional materials, tools, and provisions to support and employ more industrious people. These workers reproduce the value of what they consume each year, with a profit.

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.

To the extent that it is used in the first way, it encourages wasteful spending and increases expenses and consumption. It does so without increasing production or creating any lasting fund to support those expenses. It is harmful to society in every respect.

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.

To the extent that it is used in the second way, it promotes productive work. Although it increases society’s consumption, it also provides a lasting fund to support that consumption. Those who consume reproduce the full value of what they consume each year, plus a profit. Society’s gross revenue is the annual produce of its land and labor. It increases by the full value that these workers’ labor adds to the materials they work on. Society’s net revenue increases by the value left after deducting the cost of maintaining the workers’ tools and equipment.

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.

Banking operations force gold and silver abroad, where some of it is used to buy foreign goods for consumption at home. It seems not only probable, but almost unavoidable, that most of this money buys goods of the second kind. Some individuals may sometimes spend considerably more, even when their income does not increase at all. But we can be sure that no class or group of people ever does so. Common prudence does not always govern every individual's conduct, but it always influences the majority of every class or group. Banking operations cannot increase the income of idle people as a class in the slightest degree. Their spending as a whole therefore cannot increase much because of banking operations. Yet the spending of a few individuals among them may increase, and sometimes does. The demand of idle people for foreign goods remains the same, or very nearly the same, as before. So only a very small part of the money forced abroad by banking operations is likely to buy foreign goods for their use. Most of the money used to buy foreign goods for consumption at home will naturally be devoted to employing labor, not to supporting 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.

When calculating how much work a society’s circulating capital can support, we must count only its provisions, materials, and finished goods. We must always exclude the money, which serves only to circulate those three things. Three things are needed to put people to work: materials to work on, tools to work with, and wages or payment as a reward for the work. Money is neither a material to work on nor a tool to work with. And although workers are usually paid in money, their real income, like everyone else’s, consists not in the money itself but in its worth. It consists not in the metal coins, but in what they can buy.

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.

The amount of labor a capital can employ is clearly limited by the number of workers it can supply. They need materials, tools, and support suited to their work. Money may be needed to buy the materials and tools, as well as the workers’ support. But the amount of labor the whole capital can employ is certainly not equal to both the money and the goods it buys. It is equal to only one of those two values, and more properly to the value of the goods.

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.

When paper replaces gold and silver money, the total circulating capital may supply more materials, tools, and maintenance. The increase may equal the full value of the gold and silver previously used to purchase them. The full value of the great wheel of circulation and distribution is added to the goods it circulates and distributes. This is somewhat like what happens when a contractor on a great project takes down old machinery after a mechanical improvement. He adds the difference between the price of the old machinery and the new to his circulating capital. This is the fund from which he supplies materials and pays his workers’ wages.

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.

It is perhaps impossible to determine how a country’s circulating money compares with the total value of the annual produce it circulates. Different authors have estimated it at one fifth, one tenth, one twentieth, or one thirtieth of that value. But only part of the annual produce, often a small part, is ever intended to support industry. However small circulating money may be compared with the whole value of the annual produce, it must always be considerable compared with that part. Suppose, then, that paper money replaces gold and silver, reducing the amount needed for circulation to perhaps one fifth of the former quantity. If the value of even the greater part of the remaining four fifths is added to the funds intended to support industry, it must greatly increase the amount of industry. Consequently, it must also greatly increase the value of the annual produce of land and labor.

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.

An operation of this kind has taken place in Scotland over the past twenty-five or thirty years. New banking companies have been established in almost every sizable town and even in some rural villages. The effects have been exactly those described above. The country’s business is carried on almost entirely with the banknotes of these different companies. These notes are commonly used for purchases and payments of all kinds. Silver is very rarely seen, except in change for a twenty-shilling banknote. Gold is seen even less often. The conduct of these companies has not been beyond criticism. Indeed, it has required an act of parliament to regulate them. Nevertheless, the country has clearly benefited greatly from their business. I have heard it claimed that Glasgow’s trade doubled in about fifteen years after its first banks were established. I have also heard that Scotland’s trade has more than quadrupled since the first two public banks were established in Edinburgh. One, called the Bank of Scotland, was established by act of parliament in 1695. The other, called the Royal Bank, was established by royal charter in 1727. I do not claim to know whether the trade of Scotland or Glasgow has really grown so much in so short a time. If either has grown that much, the increase seems too great to be explained by this cause alone. Scotland’s trade and industry have, however, grown considerably during this period. There can be no doubt that the banks have contributed a great deal to this growth.

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.

The silver coins circulating in Scotland before the Union in 1707 were worth £411,117: 10: 9 sterling. This was the value of the coins brought into the Bank of Scotland to be recoined immediately after the Union. No account of the gold coins has been obtained. But the old records of the Scottish mint show that the gold coined each year was worth somewhat more than the silver. Many people, moreover, did not bring their silver to the Bank of Scotland because they doubted they would be repaid. There were also some English coins, which were not called in. The total value of gold and silver circulating in Scotland before the Union can therefore be estimated at no less than one million pounds sterling. It seems to have made up almost all the money circulating in the country. The Bank of Scotland, which then had no rival, did issue a considerable amount of money. But this seems to have been only a very small part of the total circulation. Today, Scotland’s total circulation cannot be estimated at less than two million pounds. Of that, the gold and silver most probably do not amount to half a million. Yet despite this great decrease in circulating gold and silver, Scotland’s real wealth and prosperity do not appear to have suffered. On the contrary, its agriculture, manufactures, and trade have evidently grown, as has the annual produce of its land and labour.

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.

Most banks and bankers issue their promissory notes chiefly by discounting bills of exchange. This means advancing money on the bills before they are due. Banks always deduct the legal interest on the sum advanced, for the time until the bill is due. When the bill is paid, the bank recovers the amount advanced and makes a clear profit from the interest. A banker may advance a merchant his own promissory notes, rather than gold and silver, when discounting the merchant's bill. Experience shows the banker how much of his notes' value is usually in circulation. He can then discount additional bills up to that amount. This enables him to earn interest on 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.

Scotland's trade is not very large today. It was even smaller when the first two banking companies were established. Those companies would have done little business if they had confined themselves to discounting bills of exchange. They therefore invented another way to issue their promissory notes. They offered what they call cash accounts. These accounts gave a person credit up to a certain sum, for example, two or three thousand pounds. To obtain one, the person had to find two people of unquestionable credit who owned substantial land to act as guarantors. The guarantors promised that any money advanced within the credit limit would be repaid on demand, with legal interest. I believe banks and bankers commonly grant credit of this kind throughout the world. But as far as I know, the Scottish banking companies are unique in accepting repayment on such easy terms. These terms have perhaps been the main reason for the companies' large volume of business and the benefit the country has received from it.

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

Anyone who has this kind of credit with one of these companies might borrow a thousand pounds, for example. They may repay the sum in installments of twenty or thirty pounds at a time. The company reduces the interest on the full sum in proportion to each payment, starting on the day it is paid. This continues until the whole sum is repaid. All merchants, and almost all businesspeople, therefore find it convenient to keep cash accounts with these companies. They also have an interest in promoting the companies’ business. They do so by readily accepting the companies’ notes in payment and encouraging everyone they can influence to do the same. When customers ask the banks for money, the banks generally advance it in their own promissory notes. Merchants use these notes to pay manufacturers for goods. Manufacturers pay them to farmers for materials and provisions, and farmers pay them to landlords for rent. Landlords pay them back to merchants for the conveniences and luxuries the merchants supply. Merchants then return the notes to the banks to balance their cash accounts or repay what they have borrowed. In this way, almost all the country’s monetary business is conducted using these notes. This is why the companies do so much business.

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.

With these cash accounts, every merchant can prudently carry on more trade than he otherwise could. Suppose two merchants, one in London and the other in Edinburgh, invest equal amounts of capital in the same trade. The Edinburgh merchant can prudently carry on more trade and employ more people than the London merchant. The London merchant must always keep a considerable sum of money on hand. He may keep it in his own strongbox or with his banker, who pays him no interest on it. He needs this money to meet the constant demands for payment for goods he buys on credit. Suppose he usually keeps £500 for this purpose. The value of the goods in his warehouse must always be £500 less than if he did not need to keep that money idle. Suppose he generally sells his entire stock, or goods equal to its value, once a year. Because he must keep so much money idle, he sells £500 less in goods each year than he otherwise could. His annual profits must be lower by the amount he could have earned from those additional sales. The number of people employed to prepare his goods for market must also be lower. It is lower by all the people that an additional £500 in stock could have employed. The Edinburgh merchant, on the other hand, keeps no money idle to meet such occasional demands. When they arise, he pays them from his cash account with the bank. He gradually repays the money he has borrowed using the money or paper currency he receives from occasional sales of goods. With the same capital, he can therefore prudently keep more goods in his warehouse at all times than the London merchant can. He can thus earn a greater profit himself and provide steady employment for more industrious people who prepare those goods for market. This is the great benefit the country has gained 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.

It might be thought that the ease of discounting bills of exchange gives English merchants a convenience equivalent to the cash accounts of Scotch merchants. But Scotch merchants, it must be remembered, can discount their bills of exchange just as easily as English merchants. They also have the added convenience 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.

The total paper money of every kind that can easily circulate in a country can never exceed a certain value. That is the value of the gold and silver it replaces. Assuming commerce remained the same, this gold and silver would circulate if there were no paper money. For example, suppose that twenty-shilling notes are the lowest denomination of paper money in circulation in Scotland. The total paper currency that can easily circulate there cannot exceed a certain sum. That sum is the gold and silver needed for the annual exchanges of twenty shillings or more usually made within Scotland. If the paper money in circulation ever exceeded that sum, the excess could not be sent abroad or used in domestic circulation. It would therefore immediately return to the banks to be exchanged for gold and silver. Many people would immediately see that they had more paper money than they needed for their business at home. Since they could not send it abroad, they would immediately demand payment from the banks. Once they had exchanged this surplus paper for gold and silver, they could easily use the metals by sending them abroad. But they could find no use for the surplus while it remained paper. There would therefore immediately be a run on the banks for the full amount of the surplus paper. If the banks showed any difficulty or reluctance in paying, the run would be much greater. The alarm this caused would necessarily increase 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.

Banks have expenses common to every kind of business, such as rent and wages for servants, clerks, accountants, and others. They also have two main expenses specific to banking. First, a bank must always keep a large sum of money in its vaults to meet occasional demands from holders of its notes. The bank loses the interest it could have earned on that money. Second, the bank must replenish its vaults as quickly as these occasional demands empty them.

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.

A banking company may issue more paper money than the country can use in circulation. The excess is continually returned to the company for payment. Such a company should increase the gold and silver it keeps in its vaults at all times. The increase should be much greater in proportion than the excessive increase in the paper it has in circulation. This is because its notes return to it much faster than the increase in their quantity would suggest. The company should therefore increase this first item of expense by much more than the proportion of this forced increase in its business.

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.

Such a company should keep much more money in its vaults. Yet its vaults must also empty much faster than they would if its business were kept within more reasonable limits. Refilling them would require not only greater expense, but also more constant and uninterrupted spending. The large amounts of coin continually drawn from its vaults cannot be used in the country’s circulation. The coin replaces paper money that is more than the country’s circulation can use. The coin is therefore also more than the circulation can use. But the coin will not be left idle. In one form or another, it must be sent abroad to find profitable use that it cannot find at home. This continual export of gold and silver makes it harder for the bank to find more. It must therefore make refilling the rapidly emptying vaults even more expensive. As the company’s business is forced to expand, its second item of expense must therefore increase even more than its 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.

Suppose the paper money issued by a particular bank amounts to exactly forty thousand pounds. This is the amount the country’s circulation can easily absorb and use. Suppose, too, that the bank must always keep ten thousand pounds in gold and silver in its vaults to meet occasional demands. If the bank tries to circulate forty-four thousand pounds, the extra four thousand pounds will exceed what circulation can easily absorb and use. This extra money will return to the bank almost as fast as it is issued. To meet occasional demands, therefore, the bank should always keep not just eleven thousand pounds in its vaults, but fourteen thousand. The bank will thus gain nothing from the interest on the extra four thousand pounds in circulation. It will also lose the full cost of continually collecting four thousand pounds in gold and silver. That gold and silver will continually leave its vaults as fast as it is brought in.

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.

If every bank had always understood and looked after its own interests, there could never have been too much paper money in circulation. But not every bank has always understood or looked after its own interests. As a result, there has often been too much paper money in circulation.

By issuing too great a quantity of paper, of which the excess was continually returning, in order to be exchanged for gold and silver, the Bank of England was for many years together obliged to coin gold to the extent of between eight hundred thousand pounds and a million a-year; or, at an average, about eight hundred and fifty thousand pounds. For this great coinage, the bank (in consequence of the worn and degraded state into which the gold coin had fallen a few years ago) was frequently obliged to purchase gold bullion at the high price of four pounds an ounce, which it soon after issued in coin at £3:17:10 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 Bank of England issued too much paper money, and the excess kept returning to the bank for exchange into gold and silver. As a result, for many years the bank had to coin between £800,000 and £1 million in gold each year, or about £850,000 on average. The gold coins had become worn and debased a few years earlier. To produce this large amount of coin, the bank therefore often had to buy gold bullion at the high price of £4 an ounce. Soon afterward, it issued the gold as coin at £3:17:10 1/2 an ounce. In this way, it lost between two and a half and three per cent on the coining of such a large sum. The bank therefore paid no seigniorage, and the government itself paid for the coining. Even so, the government’s generosity did not entirely prevent the bank from incurring expense.

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.

Because of a similar excess, all the Scottish banks were forced to keep agents in London to collect money for them. This cost was seldom less than one and a half or two percent. The money was sent north by wagon, and the carriers insured it at an additional cost of three quarters of one percent, or fifteen shillings per hundred pounds. The agents could not always refill the banks' coffers as quickly as they were emptied. In such cases, the banks drew bills of exchange on their London correspondents for the amount they needed. Later, the correspondents drew on the banks for payment of that amount, plus interest and commission. Some banks had been driven into such difficulty by their excessive circulation that they sometimes had only one way to pay. They drew a second set of bills, either on the same correspondents or on other correspondents in London. In this way, the same sum, or rather bills for the same sum, sometimes made more than two or three journeys. The debtor bank always paid interest and commission on the entire accumulated sum. Even Scottish banks that had never been especially reckless were sometimes forced to use this ruinous expedient.

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 Bank of England and the Scotch banks paid out gold coins in exchange for their paper money. This happened when they had issued more paper money than could circulate in the country. The gold coins paid out were also more than could circulate. Sometimes they were sent abroad as coins. Sometimes they were melted down and sent abroad as bullion. Sometimes they were melted down and sold to the Bank of England at the high price of four pounds an ounce. Only the newest, heaviest, and best coins were carefully selected to be sent abroad or melted down. At home, while they remained coins, these heavy pieces were worth no more than the light ones. But they were worth more abroad, or when melted down into bullion at home. Despite the large amount of coin it produced each year, the Bank of England found, to its astonishment, that coins were just as scarce as they had been the year before. It also issued a great quantity of good, new coins each year. Yet the state of the coinage grew worse rather than better. Every year the bank found it had to coin nearly as much gold as it had the year before. And the expense of this great annual coinage grew each year. This was because the price of gold bullion kept rising as coins continued to be worn down and clipped. By supplying its own coffers with coins, the Bank of England was indirectly obliged to supply the whole kingdom. Coins continually flowed from its coffers into the kingdom in many different ways. So the Bank of England had to supply whatever coins were needed to support the excessive circulation of both Scotch and English paper money. It had to fill whatever gaps this excessive circulation caused in the coins the kingdom needed. The Scotch banks all paid dearly, no doubt, for their own imprudence and inattention. But the Bank of England paid dearly not only for its own imprudence, but also 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.

The excessive trading of some bold speculators in both parts of the united kingdom originally caused 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.

A bank cannot properly advance a merchant or any other business owner the whole capital used in the business. Nor can it properly advance even a substantial part of that capital. It can advance only the amount the business owner would otherwise have to keep idle as cash for occasional needs. If the paper money the bank advances never exceeds this amount, it can never exceed the value of the gold and silver that would necessarily circulate in the country without paper money. It can never exceed the amount that the country’s circulation can easily absorb and use.

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 bank may discount a genuine bill of exchange for a merchant. The bill must be drawn by a real creditor on a real debtor, who actually pays it when due. The bank then merely advances the merchant part of the money he would otherwise have to keep idle and ready for occasional demands. When the debtor pays the bill, the bank recovers its advance, along with the interest. As long as the bank deals only with such customers, its funds resemble a pond. A stream continually flows out, but another flows in at the same rate. Without any further care or attention, the pond remains full, or nearly full. Such a bank can have little or no need to spend money replenishing its funds.

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.

A merchant may often need ready cash without overtrading, even when he has no bills to discount. A bank may discount his bills and also advance him money through his cash account when he needs it. It may let him repay the advances in installments as money comes in from occasional sales of his goods. On the easy terms offered by Scottish banking companies, this frees him from keeping any of his capital idle as cash for occasional demands. When such demands arise, he can meet them from his cash account. However, a bank dealing with such customers should pay close attention to their repayments over a short period. This might be four, five, six, or eight months. The bank should check whether the repayments it usually receives fully equal the advances it usually makes. If repayments from certain customers usually equal the advances over such short periods, the bank can safely continue dealing with them. The stream flowing out of its coffers may be very large. But the stream flowing in must be at least as large. So, without any further care or attention, the coffers will likely remain equally full or nearly so. They will also hardly ever need extraordinary spending to replenish them. If, on the other hand, repayments from certain other customers usually fall far short of the advances, the bank cannot safely continue dealing with them. At least, it cannot do so if they continue to deal with it in this way. The stream flowing out of its coffers is necessarily much larger than the stream flowing in. Unless the coffers are replenished through a great and continual expense, they 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.

Accordingly, Scottish banks were careful for a long time to require frequent and regular repayments from all their customers. They preferred not to deal with anyone who failed to make frequent and regular transactions with them, regardless of that person's wealth or credit. By taking this care, the banks almost entirely avoided the extraordinary expense of replenishing their cash reserves. They also 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.

First, by paying attention to repayments, the banks could make a reasonable judgment about whether their borrowers’ finances were improving or worsening. They needed no evidence beyond what their own records showed. For the most part, people make repayments regularly or irregularly depending on whether their finances are improving or worsening. A private person who lends money to perhaps six or twelve borrowers can watch and inquire into each borrower’s behavior and situation. They can do this constantly and carefully, either themselves or through agents. But a banking company may lend money to perhaps five hundred different people. Its attention is also constantly occupied with very different matters. So the bank can have no regular information about the behavior and circumstances of most borrowers beyond what its own records provide. The banking companies of Scotland probably had this advantage in mind when they required frequent and regular repayments from all their customers.

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.

Second, by taking this care, the banks protected themselves against issuing more paper money than the country’s circulation could easily absorb and use. Suppose they observed that, within reasonable periods, a particular customer’s repayments were usually at least equal to their advances to him. They could then be sure that the paper money they had advanced him had never exceeded the gold and silver he would otherwise have needed to keep on hand for occasional demands. Consequently, the paper money they had put into circulation through him had never exceeded the gold and silver that would have circulated in the country without paper money. The frequency, regularity, and amount of his repayments would demonstrate this sufficiently. They would show that the advances had never exceeded the part of his capital he would otherwise have had to keep idle and ready as cash for occasional demands. He kept this cash on hand so that the rest of his capital could remain constantly in use. Only this part of a dealer’s capital continually returns to him as money, whether paper or coin, and continually leaves him in the same form, within reasonable periods. If the bank’s advances had usually exceeded this part of his capital, his ordinary repayments could not have equaled its ordinary advances within reasonable periods. The stream flowing into the bank’s coffers through his dealings could not have equaled the stream flowing out through those same dealings. The bank’s advances of paper money might have exceeded the gold and silver the customer would otherwise have needed to keep on hand for occasional demands. If so, they might soon have exceeded the entire quantity of gold and silver that would have circulated in the country without paper money, assuming trade remained the same. They would consequently have exceeded the quantity that the country’s circulation could easily absorb and use. The excess paper money would immediately have returned to the bank to be exchanged for gold and silver. This second advantage was just as real as the first. Yet perhaps not all the banking companies in Scotland understood it as well.

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.

By discounting bills and providing cash accounts, banks can free a country’s creditworthy traders from keeping any capital idle as cash for occasional demands. Once banks have done this, traders cannot reasonably expect further help from them. Banks cannot safely go further without harming their own interests. A bank cannot afford to advance a trader all, or even most, of the circulating capital used in trade. This capital continually returns to the trader as money and goes out again in the same form. But the returns come too long after the outlays. The trader could not repay the advances in full within the moderate periods that suit a bank. A bank could still less afford to advance any substantial part of a trader’s fixed capital. Fixed capital includes what an ironworks owner spends on a forge, smelting houses, workshops, warehouses, and workers’ homes. It also includes what a mine owner spends on shafts, water pumps, roads, and wagon tracks. It includes what a land improver spends on clearing, draining, enclosing, fertilizing, and plowing waste and uncultivated fields. It also includes the cost of farmhouses and their necessary buildings, such as stables and granaries. In almost all cases, fixed capital brings returns much more slowly than circulating capital. Even when such expenses are managed with the greatest prudence and judgment, they are very seldom recovered for many years. That is far too long for a bank. Traders and other business owners may, of course, quite properly finance a very considerable part of their projects with borrowed money. In fairness to their creditors, however, their own capital should be enough to insure, so to speak, the creditors’ capital. It should make any loss to creditors extremely unlikely, even if the project falls far short of its owners’ expectations. Even with this precaution, money meant to be repaid only after several years should not be borrowed from a bank. Instead, it should be borrowed through a bond or mortgage from private individuals. These individuals intend to live on the interest without taking the trouble to put their capital to work themselves. For that reason, they are willing to lend it for several years to people with good credit. A bank would no doubt be a very convenient creditor for such traders and business owners. It lends without the cost of stamped paper or attorneys’ fees for drawing up bonds and mortgages. It also accepts repayment on the easy terms offered by the banking companies of Scotland. But such traders and business owners would surely be most inconvenient debtors for 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.

More than twenty-five years ago, the paper money issued by Scotland’s banking companies was already equal to what the country’s circulation could easily absorb and use. In fact, it was somewhat more than enough. Even then, the banks had given Scotland’s merchants and other business owners all the help they could give while protecting their own interests. They had even done somewhat more. They had lent a little too much, bringing losses, or at least reduced profits, upon themselves. In banking, even the slightest excess of lending always has this effect. Having received so much help from the banks, these merchants and business owners wanted still more. They seem to have thought that banks could extend credit to any amount needed. The only expense, they thought, would be a few reams of paper. They complained that bank directors were narrow-minded and cowardly. The directors, they said, did not extend credit in proportion to the growth of the country’s trade. By the growth of trade, they no doubt meant the expansion of their own projects. These had grown beyond what they could manage with their own capital or with what private individuals would lend them through the usual bonds or mortgages. They seem to have thought that the banks were bound by honor to make up the difference. The banks, they thought, should provide all the capital they wanted for their businesses. The banks, however, had a different opinion. When they refused to extend more credit, some merchants turned to another expedient. For a time, it served their purpose as effectively as the fullest extension of bank credit could have done, though at a much greater expense. This was the well-known practice of drawing and redrawing bills, a device struggling merchants sometimes use when they are on the brink of bankruptcy. This way of raising money had long been known in England. During the recent war, the high profits of trade strongly tempted merchants to overextend themselves. The practice is said to have become very widespread during that time. It came to Scotland from England. There, relative to the country’s very limited commerce and modest capital, it soon became much more widespread than it had ever 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 practice of drawing and redrawing is so well known to all businesspeople that explaining it may seem unnecessary. But this book may reach many people who are not in business. And perhaps even businesspeople do not generally understand how this practice affects banking. For these reasons, I will try to explain it as clearly 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.

Merchants developed customs at a time when Europe’s barbaric laws did not enforce their contracts. Over the past two centuries, all European nations have adopted these customs into their laws. They have given bills of exchange extraordinary privileges. As a result, money is more readily advanced against them than against any other kind of obligation. This is especially true when a bill is payable within two or three months of its date. When a bill comes due, the acceptor must pay it as soon as it is presented. If he does not, he becomes bankrupt from that moment. The bill is formally protested and returned to the drawer. If the drawer does not pay it immediately, he too becomes bankrupt. Before reaching the person who presents it for payment, the bill may have passed through several other hands. Each person would have advanced its value to the next, either in money or goods. Each would also have endorsed the bill, signing the back in turn to show that he had received its value. Each endorser then becomes liable in turn to pay that value to the bill’s owner. If he fails to pay, he too becomes bankrupt from that moment. The drawer, acceptor, and endorsers may all have doubtful credit. Even so, the bill’s short term gives its owner some security. Though all of them may be very likely to become bankrupt, they might not all do so in such a short time. A weary traveller tells himself that the house is unsound and will not stand much longer. But it might not fall tonight, so he will venture to sleep in it tonight.

The trader A in Edinburgh, we shall suppose, draws a bill upon B in London, payable two months after date. In reality B in London owes nothing to A in Edinburgh; but he agrees to accept of A’s bill, upon condition, that before the term of payment he shall redraw upon A in Edinburgh for the same sum, together with the interest and a commission, another bill, payable likewise two months after date. B accordingly, before the expiration of the first two months, redraws this bill upon A in Edinburgh; who, again before the expiration of the second two months, draws a second bill upon B in London, payable likewise two months after date; and before the expiration of the third two months, B in London redraws upon A in Edinburgh another bill payable also two months after date. This practice has sometimes gone on, not only for several months, but for several years together, the bill always returning upon A in Edinburgh with the accumulated interest and commission of all the former bills. The interest was five per cent. in the year, and the commission was never less than one half per cent. on each draught. This commission being repeated more than six times in the year, whatever money A might raise by this expedient might necessarily have cost him something more than eight per cent. in the year and sometimes a great deal more, when either the price of the commission happened to rise, or when he was obliged to pay compound interest upon the interest and commission of former bills. This practice was called raising money by circulation.

Suppose trader A in Edinburgh draws a bill on B in London, payable two months after it is dated. In fact, B in London owes nothing to A in Edinburgh. But B agrees to accept A’s bill on one condition. Before payment is due, B must be able to draw another bill on A in Edinburgh. This bill will be for the same sum, plus interest and a commission, and will also be payable after two months. Accordingly, before the first two months expire, B draws this bill on A in Edinburgh. Then, before the second two months expire, A draws a second bill on B in London, also payable after two months. Before the third two months expire, B in London draws another bill on A in Edinburgh, again payable after two months. This practice has sometimes continued not just for several months, but for several years. The bill always returns to A in Edinburgh with the accumulated interest and commission from all the previous bills. The interest was five percent a year, and the commission was never less than half a percent on each bill. Since this commission was charged more than six times a year, any money A raised this way necessarily cost him more than eight percent a year. Sometimes it cost him much more. This happened when the commission rate rose or when he had to pay compound interest on previous bills’ interest and commissions. This practice was called raising money by circulation.

In a country where the ordinary profits of stock, in the greater part of mercantile projects, are supposed to run between six and ten per cent. it must have been a very fortunate speculation, of which the returns could not only repay the enormous expense at which the money was thus borrowed for carrying it on, but afford, besides, a good surplus profit to the projector. Many vast and extensive projects, however, were undertaken, and for several years carried on, without any other fund to support them besides what was raised at this enormous expense. The projectors, no doubt, had in their golden dreams the most distinct vision of this great profit. Upon their awakening, however, either at the end of their projects, or when they were no longer able to carry them on, they very seldom, I believe, had the good fortune to find it.

In a country where ordinary profits on capital in most commercial ventures are thought to range from six to ten percent, a venture would have to be very fortunate to repay the enormous cost of borrowing the money to finance it. It would also have to leave its organizer a good surplus profit. Yet many vast projects were undertaken and carried on for several years with no other funding than money borrowed at this enormous cost. The organizers, no doubt, saw this great profit most clearly in their golden dreams. But when they awoke, either at the end of their projects or when they could no longer carry them on, they very seldom, I believe, had the good fortune to find it.

{The method described in the text was by no means either the most common or the most expensive one in which those adventurers sometimes raised money by circulation. It frequently happened, that A in Edinburgh would enable B in London to pay the first bill of exchange, by drawing, a few days before it became due, a second bill at three months date upon the same B in London. This bill, being payable to his own order, A sold in Edinburgh at par; and with its contents purchased bills upon London, payable at sight to the order of B, to whom he sent them by the post. Towards the end of the late war, the exchange between Edinburgh and London was frequently three per cent. against Edinburgh, and those bills at sight must frequently have cost A that premium. This transaction, therefore, being repeated at least four times in the year, and being loaded with a commission of at least one half per cent. upon each repetition, must at that period have cost A, at least, fourteen per cent. in the year. At other times A would enable to discharge the first bill of exchange, by drawing, a few days before it became due, a second bill at two months date, not upon B, but upon some third person, C, for example, in London. This other bill was made payable to the order of B, who, upon its being accepted by C, discounted it with some banker in London; and A enabled C to discharge it, by drawing, a few day’s before it became due, a third bill likewise at two months date, sometimes upon his first correspondent B, and sometimes upon some fourth or fifth person, D or E, for example. This third bill was made payable to the order of C, who, as soon as it was accepted, discounted it in the same manner with some banker in London. Such operations being repeated at least six times in the year, and being loaded with a commission of at least one half per cent. upon each repetition, together with the legal interest of five per cent. this method of raising money, in the same manner as that described in the text, must have cost A something more than eight per cent. By saving, however, the exchange between Edinburgh and London, it was less expensive than that mentioned in the foregoing part of this note; but then it required an established credit with more houses than one in London, an advantage which many of these adventurers could not always find it easy to procure.}

The method described in the text was neither the most common nor the most expensive way these adventurers sometimes raised money by circulating bills. Often, A in Edinburgh helped B in London pay the first bill of exchange by drawing a second bill on B. He did this a few days before the first bill came due. The second bill was due in three months and payable to A’s own order. A sold it in Edinburgh at face value and used the proceeds to buy bills on London, payable immediately to B’s order. He sent these bills to B by post. Toward the end of the recent war, the exchange rate between Edinburgh and London was often 3 percent against Edinburgh. A must therefore often have paid that premium for the bills payable immediately. The transaction was repeated at least four times a year, with a commission of at least one half percent each time. At that period, it must therefore have cost A at least 14 percent a year. At other times, A helped B pay the first bill by drawing a second bill a few days before the first came due. The second bill was due in two months and was drawn not on B but on a third person in London, C, for example. This bill was payable to B’s order. Once C accepted it, B discounted it with a London banker. A then helped C pay it by drawing a third bill a few days before the second came due. This bill was also due in two months. Sometimes A drew it on his first correspondent, B, and sometimes on a fourth or fifth person, D or E, for example. The third bill was payable to C’s order. As soon as it was accepted, C discounted it in the same way with a London banker. These operations were repeated at least six times a year, with a commission of at least one half percent each time. Together with the legal interest rate of 5 percent, this method of raising money must have cost A a little more than 8 percent, as did the method described in the text. But it saved the cost of exchange between Edinburgh and London, so it was less expensive than the method mentioned earlier in this note. It did, however, require established credit with more than one London house. Many of these adventurers could not always obtain that advantage easily.

The bills which A in Edinburgh drew upon B in London, he regularly discounted two months before they were due, with some bank or banker in Edinburgh; and the bills which B in London redrew upon A in Edinburgh, he as regularly discounted, either with the Bank of England, or with some other banker in London. Whatever was advanced upon such circulating bills was in Edinburgh advanced in the paper of the Scotch banks; and in London, when they were discounted at the Bank of England in the paper of that bank. Though the bills upon which this paper had been advanced were all of them repaid in their turn as soon as they became due, yet the value which had been really advanced upon the first bill was never really returned to the banks which advanced it; because, before each bill became due, another bill was always drawn to somewhat a greater amount than the bill which was soon to be paid: and the discounting of this other bill was essentially necessary towards the payment of that which was soon to be due. This payment, therefore, was altogether fictitious. The stream which, by means of those circulating bills of exchange, had once been made to run out from the coffers of the banks, was never replaced by any stream which really ran into them.

A in Edinburgh regularly discounted the bills he drew on B in London with an Edinburgh bank or banker. He did so two months before the bills were due. B in London was just as regular in discounting the bills he drew in return on A in Edinburgh. He discounted them either with the Bank of England or with another London banker. In Edinburgh, the money advanced on these circulating bills was in Scottish banknotes. In London, when the Bank of England discounted the bills, the money was in its banknotes. All the bills for which the banks had advanced these notes were paid when they became due. Yet the value originally advanced on the first bill was never really returned to the banks that advanced it. Before each bill became due, another was always drawn for a somewhat larger amount. Discounting the new bill was essential to paying the one coming due. The payment was therefore entirely fictitious. The circulating bills of exchange had caused a stream of money to flow out of the banks’ coffers. No stream ever really flowed back in to replace it.

The paper which was issued upon those circulating bills of exchange amounted, upon many occasions, to the whole fund destined for carrying on some vast and extensive project of agriculture, commerce, or manufactures; and not merely to that part of it which, had there been no paper money, the projector would have been obliged to keep by him unemployed, and in ready money, for answering occasional demands. The greater part of this paper was, consequently, over and above the value of the gold and silver which would have circulated in the country, had there been no paper money. It was over and above, therefore, what the circulation of the country could easily absorb and employ, and upon that account, immediately returned upon the banks, in order to be exchanged for gold and silver, which they were to find as they could. It was a capital which those projectors had very artfully contrived to draw from those banks, not only without their knowledge or deliberate consent, but for some time, perhaps, without their having the most distant suspicion that they had really advanced it.

The paper money issued on those circulating bills of exchange often amounted to the entire fund for a vast agricultural, commercial, or manufacturing project. It was not limited to the part the project’s owner would otherwise have had to keep idle as cash for occasional demands. As a result, most of this paper money exceeded the value of the gold and silver that would have circulated in the country without it. It therefore exceeded the amount the country’s circulation could easily absorb and use. For that reason, it immediately returned to the banks to be exchanged for gold and silver. The banks had to find the gold and silver as best they could. The projectors had cleverly contrived to draw this capital from the banks without their knowledge or deliberate consent. For some time, perhaps, the banks did not even remotely suspect that they had actually advanced it.

When two people, who are continually drawing and redrawing upon one another, discount their bills always with the same banker, he must immediately discover what they are about, and see clearly that they are trading, not with any capital of their own, but with the capital which he advances to them. But this discovery is not altogether so easy when they discount their bills sometimes with one banker, and sometimes with another, and when the two same persons do not constantly draw and redraw upon one another, but occasionally run the round of a great circle of projectors, who find it for their interest to assist one another in this method of raising money and to render it, upon that account, as difficult as possible to distinguish between a real and a fictitious bill of exchange, between a bill drawn by a real creditor upon a real debtor, and a bill for which there was properly no real creditor but the bank which discounted it, nor any real debtor but the projector who made use of the money. When a banker had even made this discovery, he might sometimes make it too late, and might find that he had already discounted the bills of those projectors to so great an extent, that, by refusing to discount any more, he would necessarily make them all bankrupts; and thus by ruining them, might perhaps ruin himself. For his own interest and safety, therefore, he might find it necessary, in this very perilous situation, to go on for some time, endeavouring, however, to withdraw gradually, and, upon that account, making every day greater and greater difficulties about discounting, in order to force these projectors by degrees to have recourse, either to other bankers, or to other methods of raising money: so as that he himself might, as soon as possible, get out of the circle. The difficulties, accordingly, which the Bank of England, which the principal bankers in London, and which even the more prudent Scotch banks began, after a certain time, and when all of them had already gone too far, to make about discounting, not only alarmed, but enraged, in the highest degree, those projectors. Their own distress, of which this prudent and necessary reserve of the banks was, no doubt, the immediate occasion, they called the distress of the country; and this distress of the country, they said, was altogether owing to the ignorance, pusillanimity, and bad conduct of the banks, which did not give a sufficiently liberal aid to the spirited undertakings of those who exerted themselves in order to beautify, improve, and enrich the country. It was the duty of the banks, they seemed to think, to lend for as long a time, and to as great an extent, as they might wish to borrow. The banks, however, by refusing in this manner to give more credit to those to whom they had already given a great deal too much, took the only method by which it was now possible to save either their own credit, or the public credit of the country.

When two people constantly draw and redraw bills of exchange on each other, they may always discount them with the same banker. The banker must immediately see what they are doing. They are trading not with their own capital, but with the capital he advances to them. But the scheme is harder to detect when they discount their bills with different bankers. It is also harder to detect when the same two people do not always draw and redraw on each other. Instead, they sometimes pass bills around a large circle of speculators. These speculators find it in their interest to help one another raise money in this way. They also find it in their interest to make genuine and fictitious bills of exchange as hard to distinguish as possible. A genuine bill is drawn by a real creditor on a real debtor. With a fictitious bill, the only real creditor is the bank that discounted it. The only real debtor is the speculator who used the money. Even when a banker discovered the scheme, he might find out too late. He might already have discounted so many bills for the speculators that refusing more would necessarily bankrupt them all. By ruining them, he might perhaps ruin himself. For his own interest and safety, he might therefore have to continue for some time in this very dangerous position. But he would try to withdraw gradually, making it harder each day for the speculators to discount their bills. In this way, he would gradually force them to turn to other bankers or other methods of raising money. He could then get out of the circle as soon as possible. After a time, the Bank of England, the principal bankers in London, and even the more prudent Scotch banks began making it harder to discount bills. By then, they had all already gone too far. Their restrictions not only alarmed the speculators but enraged them to the highest degree. The speculators called their own distress the distress of the country. The banks' prudent and necessary caution was, no doubt, the immediate cause of that distress. But the speculators said the country's distress was entirely due to the banks' ignorance, timidity, and bad conduct. They complained that the banks did not give enough generous support to their bold undertakings. These were the undertakings of people who were working to beautify, improve, and enrich the country. The speculators seemed to think that banks had a duty to lend them as much as they wished, for as long as they wished. But the banks had already given these borrowers far too much credit. By refusing to give them more, the banks took the only course still possible to save their own credit or the country's public credit.

In the midst of this clamour and distress, a new bank was established in Scotland, for the express purpose of relieving the distress of the country. The design was generous; but the execution was imprudent, and the nature and causes of the distress which it meant to relieve, were not, perhaps, well understood. This bank was more liberal than any other had ever been, both in granting cash-accounts, and in discounting bills of exchange. With regard to the latter, it seems to have made scarce any distinction between real and circulating bills, but to have discounted all equally. It was the avowed principle of this bank to advance upon any reasonable security, the whole capital which was to be employed in those improvements of which the returns are the most slow and distant, such as the improvements of land. To promote such improvements was even said to be the chief of the public-spirited purposes for which it was instituted. By its liberality in granting cash-accounts, and in discounting bills of exchange, it, no doubt, issued great quantities of its bank notes. But those bank notes being, the greater part of them, over and above what the circulation of the country could easily absorb and employ, returned upon it, in order to be exchanged for gold and silver, as fast as they were issued. Its coffers were never well filled. The capital which had been subscribed to this bank, at two different subscriptions, amounted to one hundred and sixty thousand pounds, of which eighty per cent. only was paid up. This sum ought to have been paid in at several different instalments. A great part of the proprietors, when they paid in their first instalment, opened a cash-account with the bank; and the directors, thinking themselves obliged to treat their own proprietors with the same liberality with which they treated all other men, allowed many of them to borrow upon this cash-account what they paid in upon all their subsequent instalments. Such payments, therefore, only put into one coffer what had the moment before been taken out of another. But had the coffers of this bank been filled ever so well, its excessive circulation must have emptied them faster than they could have been replenished by any other expedient but the ruinous one of drawing upon London; and when the bill became due, paying it, together with interest and commission, by another draught upon the same place. Its coffers having been filled so very ill, it is said to have been driven to this resource within a very few months after it began to do business. The estates of the proprietors of this bank were worth several millions, and, by their subscription to the original bond or contract of the bank, were really pledged for answering all its engagements. By means of the great credit which so great a pledge necessarily gave it, it was, notwithstanding its too liberal conduct, enabled to carry on business for more than two years. When it was obliged to stop, it had in the circulation about two hundred thousand pounds in bank notes. In order to support the circulation of those notes, which were continually returning upon it as fast as they were issued, it had been constantly in the practice of drawing bills of exchange upon London, of which the number and value were continually increasing, and, when it stopt, amounted to upwards of six hundred thousand pounds. This bank, therefore, had, in little more than the course of two years, advanced to different people upwards of eight hundred thousand pounds at five per cent. Upon the two hundred thousand pounds which it circulated in bank notes, this five per cent. might perhaps be considered as a clear gain, without any other deduction besides the expense of management. But upon upwards of six hundred thousand pounds, for which it was continually drawing bills of exchange upon London, it was paying, in the way of interest and commission, upwards of eight per cent. and was consequently losing more than three per cent. upon more than three fourths of all its dealings.

Amid this outcry and distress, a new bank was established in Scotland specifically to relieve the country’s distress. The aim was generous, but the execution was imprudent. Perhaps the nature and causes of the distress were not well understood. The bank was more generous than any before it, both in granting cash accounts and in discounting bills of exchange. It seems to have made hardly any distinction between genuine bills and circulating bills, discounting them all equally. The bank openly declared that it would advance, against any reasonable security, the entire capital needed for improvements with the slowest and most distant returns, such as improvements to land. Promoting such improvements was even said to be the chief public-spirited purpose for which the bank was established. By its generous granting of cash accounts and discounting of bills, the bank no doubt issued great quantities of banknotes. But most of these notes exceeded what the country’s circulation could easily absorb and use. They therefore returned to the bank for exchange into gold and silver as fast as they were issued. Its coffers were never well filled. The capital pledged to the bank in two separate subscriptions amounted to £160,000, of which only 80 percent was paid. This sum was supposed to be paid in several installments. When they paid their first installment, many proprietors opened cash accounts with the bank. The directors thought they had to treat their own proprietors as generously as everyone else. They therefore allowed many proprietors to borrow on these accounts the money they paid in for all later installments. Such payments merely put into one coffer what had just been taken out of another. But however well filled the bank’s coffers had been, its excessive issue of notes would have emptied them faster than they could be refilled by any other means except a ruinous one. That means was to draw bills on London and, when each bill came due, pay it with interest and commission by drawing another bill on London. Because its coffers had been so poorly filled, the bank is said to have resorted to this practice within a few months of opening. The bank’s proprietors owned estates worth several million pounds. By signing the bank’s original bond or contract, they had effectively pledged these estates to cover all its obligations. This substantial pledge necessarily gave the bank great credit. Despite its excessive generosity, the bank was therefore able to continue operating for more than two years. When it was forced to stop, it had about £200,000 in banknotes in circulation. These notes continually returned to it as fast as they were issued. To support their circulation, the bank had constantly drawn bills of exchange on London. These bills continually increased in number and value, and when the bank stopped, they amounted to more than £600,000. Thus, in little more than two years, the bank had advanced more than £800,000 to various people at 5 percent interest. On the £200,000 circulated in banknotes, that 5 percent might perhaps be regarded as clear profit, apart from management expenses. But on the more than £600,000 for which it continually drew bills on London, it paid more than 8 percent in interest and commission. It was consequently losing more than 3 percent on more than three-quarters of all its business.

The operations of this bank seem to have produced effects quite opposite to those which were intended by the particular persons who planned and directed it. They seem to have intended to support the spirited undertakings, for as such they considered them, which were at that time carrying on in different parts of the country; and, at the same time, by drawing the whole banking business to themselves, to supplant all the other Scotch banks, particularly those established at Edinburgh, whose backwardness in discounting bills of exchange had given some offence. This bank, no doubt, gave some temporary relief to those projectors, and enabled them to carry on their projects for about two years longer than they could otherwise have done. But it thereby only enabled them to get so much deeper into debt; so that, when ruin came, it fell so much the heavier both upon them and upon their creditors. The operations of this bank, therefore, instead of relieving, in reality aggravated in the long-run the distress which those projectors had brought both upon themselves and upon their country. It would have been much better for themselves, their creditors, and their country, had the greater part of them been obliged to stop two years sooner than they actually did. The temporary relief, however, which this bank afforded to those projectors, proved a real and permanent relief to the other Scotch banks. All the dealers in circulating bills of exchange, which those other banks had become so backward in discounting, had recourse to this new bank, where they were received with open arms. Those other banks, therefore, were enabled to get very easily out of that fatal circle, from which they could not otherwise have disengaged themselves without incurring a considerable loss, and perhaps, too, even some degree of discredit.

This bank’s operations seem to have had effects quite opposite to those intended by the people who planned and directed it. They seem to have intended to support the ventures underway in different parts of the country. They regarded these ventures as bold undertakings. At the same time, they wanted to draw all banking business to their bank and displace the other Scottish banks. They particularly wanted to displace the banks established in Edinburgh, whose reluctance to discount bills of exchange had caused some resentment. This bank undoubtedly gave the projectors some temporary relief. It enabled them to continue their projects for about two years longer than they otherwise could have done. But this only allowed them to fall deeper into debt. When ruin came, it therefore fell all the more heavily on them and their creditors. So, instead of relieving the distress the projectors had brought on themselves and their country, the bank’s operations actually made it worse in the long run. It would have been much better for the projectors, their creditors, and their country if most of them had been forced to stop two years earlier. The temporary relief this bank gave the projectors, however, proved to be real and lasting relief for the other Scottish banks. Those banks had become so reluctant to discount circulating bills of exchange. All the dealers in these bills turned to the new bank, where they were welcomed with open arms. The other banks could therefore escape very easily from that fatal circle. Otherwise, they could not have escaped without suffering a considerable loss and perhaps some damage to their reputations.

In the long-run, therefore, the operations of this bank increased the real distress of the country, which it meant to relieve; and effectually relieved, from a very great distress, those rivals whom it meant to supplant.

In the long run, the bank’s operations therefore increased the country’s hardship, which the bank had meant to relieve. They also effectively relieved the bank’s rivals of great hardship, even though the bank had meant to replace them.

At the first setting out of this bank, it was the opinion of some people, that how fast soever its coffers might be emptied, it might easily replenish them, by raising money upon the securities of those to whom it had advanced its paper. Experience, I believe, soon convinced them that this method of raising money was by much too slow to answer their purpose; and that coffers which originally were so ill filled, and which emptied themselves so very fast, could be replenished by no other expedient but the ruinous one of drawing bills upon London, and when they became due, paying them by other draughts on the same place, with accumulated interest and commission. But though they had been able by this method to raise money as fast as they wanted it, yet, instead of making a profit, they must have suffered a loss of every such operation; so that in the long-run they must have ruined themselves as a mercantile company, though perhaps not so soon as by the more expensive practice of drawing and redrawing. They could still have made nothing by the interest of the paper, which, being over and above what the circulation of the country could absorb and employ, returned upon them in order to be exchanged for gold and silver, as fast as they issued it; and for the payment of which they were themselves continually obliged to borrow money. On the contrary, the whole expense of this borrowing, of employing agents to look out for people who had money to lend, of negotiating with those people, and of drawing the proper bond or assignment, must have fallen upon them, and have been so much clear loss upon the balance of their accounts. The project of replenishing their coffers in this manner may be compared to that of a man who had a water-pond from which a stream was continually running out, and into which no stream was continually running, but who proposed to keep it always equally full, by employing a number of people to go continually with buckets to a well at some miles distance, in order to bring water to replenish it.

When the bank first started, some people believed it could easily refill its coffers, however quickly they were emptied. They thought the bank could borrow money against the securities pledged by those to whom it had advanced paper money. Experience soon convinced them, I believe, that this method was far too slow for their purpose. The coffers had been so poorly filled to begin with, and emptied so quickly, that only one other means could replenish them. This was the ruinous practice of drawing bills on London and, when they came due, paying them with new bills on London, along with accumulated interest and commission. But even if the bank had raised money this way as fast as it needed, each transaction would have brought a loss rather than a profit. So, in the long run, the bank would have ruined itself as a commercial company. Perhaps, though, it would not have done so as quickly as by the more expensive practice of drawing and redrawing bills. The bank still could have earned nothing from the interest on its paper money. The paper exceeded what the country’s circulation could absorb and use, so it returned to the bank for exchange into gold and silver as fast as it was issued. To pay out the gold and silver, the bank had to keep borrowing money. On the contrary, the bank would have borne the entire cost of borrowing. It had to pay agents to find people with money to lend, negotiate with them, and draw up the necessary bond or assignment. All these expenses would have been a clear loss in its accounts. The plan to refill the bank’s coffers this way may be compared to a man’s plan for a pond. A stream was constantly flowing out of the pond, but none was flowing into it. The man proposed to keep the pond full by employing people to carry water in buckets from a well several miles away.

But though this operation had proved not only practicable, but profitable to the bank, as a mercantile company; yet the country could have derived no benefit front it, but, on the contrary, must have suffered a very considerable loss by it. This operation could not augment, in the smallest degree, the quantity of money to be lent. It could only have erected this bank into a sort of general loan office for the whole country. Those who wanted to borrow must have applied to this bank, instead of applying to the private persons who had lent it their money. But a bank which lends money, perhaps to five hundred different people, the greater part of whom its directors can know very little about, is not likely to be more judicious in the choice of its debtors than a private person who lends out his money among a few people whom he knows, and in whose sober and frugal conduct he thinks he has good reason to confide. The debtors of such a bank as that whose conduct I have been giving some account of were likely, the greater part of them, to be chimerical projectors, the drawers and redrawers of circulating bills of exchange, who would employ the money in extravagant undertakings, which, with all the assistance that could be given them, they would probably never be able to complete, and which, if they should be completed, would never repay the expense which they had really cost, would never afford a fund capable of maintaining a quantity of labour equal to that which had been employed about them. The sober and frugal debtors of private persons, on the contrary, would be more likely to employ the money borrowed in sober undertakings which were proportioned to their capitals, and which, though they might have less of the grand and the marvellous, would have more of the solid and the profitable; which would repay with a large profit whatever had been laid out upon them, and which would thus afford a fund capable of maintaining a much greater quantity of labour than that which had been employed about them. The success of this operation, therefore, without increasing in the smallest degree the capital of the country, would only have transferred a great part of it from prudent and profitable to imprudent and unprofitable undertakings.

Although this operation had proved practical and profitable for the bank as a commercial company, the country could not have benefited from it. On the contrary, the country must have suffered a very considerable loss. The operation could not increase the amount of money available to lend in the slightest. It could only have made the bank a kind of general loan office for the whole country. Borrowers would have applied to the bank instead of to the private individuals who had lent it their money. A bank might lend money to five hundred different people, most of whom its directors could know very little about. Such a bank is unlikely to choose its borrowers more wisely than a private lender. A private lender lends money to a few people he knows. He believes he has good reason to trust them to be sensible and thrifty. Most borrowers from a bank like the one whose conduct I have been describing were likely to be dreamers with fanciful projects. They were likely to draw and redraw circulating bills of exchange. They would use the money for extravagant ventures that they would probably never complete, whatever help they received. Even if completed, these ventures would never repay their true costs. They would never provide a fund capable of supporting as much labor as had gone into them. The sensible and thrifty borrowers who borrowed from private lenders, by contrast, would be more likely to use the money for sensible ventures suited to their capital. These ventures might be less grand and marvelous, but they would be more solid and profitable. They would repay everything spent on them, with a large profit. They would thus provide a fund capable of supporting much more labor than had gone into them. The success of this operation would not have increased the country's capital in the slightest. It would only have transferred a large part of that capital from prudent and profitable ventures to imprudent and unprofitable ones.

That the industry of Scotland languished for want of money to employ it, was the opinion of the famous Mr Law. By establishing a bank of a particular kind, which he seems to have imagined might issue paper to the amount of the whole value of all the lands in the country, he proposed to remedy this want of money. The parliament of Scotland, when he first proposed his project, did not think proper to adopt it. It was afterwards adopted, with some variations, by the Duke of Orleans, at that time regent of France. The idea of the possibility of multiplying paper money to almost any extent was the real foundation of what is called the Mississippi scheme, the most extravagant project, both of banking and stock-jobbing, that perhaps the world ever saw. The different operations of this scheme are explained so fully, so clearly, and with so much order and distinctness, by Mr Du Verney, in his Examination of the Political Reflections upon commerce and finances of Mr Du Tot, that I shall not give any account of them. The principles upon which it was founded are explained by Mr Law himself, in a discourse concerning money and trade, which he published in Scotland when he first proposed his project. The splendid but visionary ideas which are set forth in that and some other works upon the same principles, still continue to make an impression upon many people, and have, perhaps, in part, contributed to that excess of banking, which has of late been complained of, both in Scotland and in other places.

The famous Mr Law believed that Scottish industry was struggling because it lacked money to put it to work. He proposed to remedy this shortage by establishing a particular kind of bank. He seems to have imagined that it could issue paper money equal to the value of all the country’s land. When he first proposed the project, the Scottish parliament chose not to adopt it. Later, the Duke of Orleans, then regent of France, adopted it with some variations. The idea that paper money could be multiplied almost without limit was the real foundation of the Mississippi scheme. It was perhaps the most extravagant project of banking and stock speculation the world has ever seen. Mr Du Verney explained its various operations fully, clearly, and systematically in his Examination of the Political Reflections upon commerce and finances of Mr Du Tot. I shall therefore give no account of them. Mr Law himself explained the principles behind the scheme in a discourse on money and trade. He published it in Scotland when he first proposed his project. The grand but visionary ideas in that discourse and other works based on the same principles still impress many people. They have perhaps contributed in part to the excessive banking recently complained of in Scotland and elsewhere.

The Bank of England is the greatest bank of circulation in Europe. It was incorporated, in pursuance of an act of parliament, by a charter under the great seal, dated the 27th of July 1694. It at that time advanced to government the sum of £1,200,000 for an annuity of £100,000, or for £ 96,000 a-year, interest at the rate of eight per cent. and £4,000 a-year for the expense of management. The credit of the new government, established by the Revolution, we may believe, must have been very low, when it was obliged to borrow at so high an interest.

The Bank of England is the largest bank of circulation in Europe. It was incorporated under an act of Parliament by a charter bearing the Great Seal, dated July 27, 1694. At that time, the bank lent the government £1,200,000 in return for an annual payment of £100,000. Of this payment, £96,000 was interest at eight percent, and £4,000 was for management expenses. We may believe that the credit of the new government, established by the Revolution, must have been very low. It was, after all, forced to borrow at such a high interest rate.

In 1697, the bank was allowed to enlarge its capital stock, by an ingraftment of £1,001,171:10s. Its whole capital stock, therefore, amounted at this time to £2,201,171: 10s. This ingraftment is said to have been for the support of public credit. In 1696, tallies had been at forty, and fifty, and sixty, per cent. discount, and bank notes at twenty per cent. {James Postlethwaite’s History of the Public Revenue, p.301.} During the great re-coinage of the silver, which was going on at this time, the bank had thought proper to discontinue the payment of its notes, which necessarily occasioned their discredit.

In 1697, the bank was allowed to increase its capital stock by £1,001,171 and 10 shillings. Its total capital stock then came to £2,201,171 and 10 shillings. The increase is said to have been intended to support public credit. In 1696, tallies had traded at discounts of 40, 50, and 60 percent, and bank notes at 20 percent. {James Postlethwaite’s History of the Public Revenue, p.301.} At this time, silver coins were being melted down and reminted in the great re-coinage. During this process, the bank had decided to stop paying out on its notes. This necessarily caused the notes to lose credibility.

In pursuance of the 7th Anne, c. 7, the bank advanced and paid into the exchequer the sum of £400,000; making in all the sum of £1,600,000, which it had advanced upon its original annuity of £96,000 interest, and £4,000 for expense of management. In 1708, therefore, the credit of government was as good as that of private persons, since it could borrow at six per cent. interest, the common legal and market rate of those times. In pursuance of the same act, the bank cancelled exchequer bills to the amount of £ 1,775,027: 17s: 10½d. at six per cent. interest, and was at the same time allowed to take in subscriptions for doubling its capital. In 1703, therefore, the capital of the bank amounted to £4,402,343; and it had advanced to government the sum of £3,375,027:17:10½d.

Under the act 7 Anne, c. 7, the bank lent and paid £400,000 into the exchequer. This brought its total lending under the original annuity to £1,600,000. The annuity paid £96,000 in interest and £4,000 for management expenses. In 1708, therefore, the government’s credit was as good as that of private individuals. It could borrow at six percent interest, the usual legal and market rate at the time. Under the same act, the bank cancelled £1,775,027: 17s: 10½d. in exchequer bills bearing six percent interest. It was also allowed to accept subscriptions to double its capital. In 1703, therefore, the bank’s capital amounted to £4,402,343. It had lent the government £3,375,027:17:10½d.

By a call of fifteen per cent. in 1709, there was paid in, and made stock, £ 656,204:1:9d.; and by another of ten per cent. in 1710, £501,448:12:11d. In consequence of those two calls, therefore, the bank capital amounted to £ 5,559,995:14:8d.

A 15 percent call in 1709 brought in £656,204:1:9d., which was added to the stock. Another 10 percent call in 1710 brought in £501,448:12:11d. As a result of these two calls, the bank’s capital amounted to £5,559,995:14:8d.

In pursuance of the 3rd George I. c.8, the bank delivered up two millions of exchequer Bills to be cancelled. It had at this time, therefore, advanced to government £5,375,027:17 10d. In pursuance of the 8th George I. c.21, the bank purchased of the South-sea company, stock to the amount of £4,000,000: and in 1722, in consequence of the subscriptions which it had taken in for enabling it to make this purchase, its capital stock was increased by £ 3,400,000. At this time, therefore, the bank had advanced to the public £ 9,375,027 17s. 10½d.; and its capital stock amounted only to £ 8,959,995:14:8d. It was upon this occasion that the sum which the bank had advanced to the public, and for which it received interest, began first to exceed its capital stock, or the sum for which it paid a dividend to the proprietors of bank stock; or, in other words, that the bank began to have an undivided capital, over and above its divided one. It has continued to have an undivided capital of the same kind ever since. In 1746, the bank had, upon different occasions, advanced to the public £11,686,800, and its divided capital had been raised by different calls and subscriptions to £ 10,780,000. The state of those two sums has continued to be the same ever since. In pursuance of the 4th of George III. c.25, the bank agreed to pay to government for the renewal of its charter £110,000, without interest or re-payment. This sum, therefore did not increase either of those two other sums.

Under the 3rd George I, c. 8, the bank surrendered £2 million in exchequer bills to be cancelled. The bank had therefore advanced £5,375,027 17s. 10d. to the government by this time. Under the 8th George I, c. 21, the bank bought £4 million in stock from the South-sea company. To finance the purchase, the bank had raised money through subscriptions. As a result, its capital stock increased by £3,400,000 in 1722. By then, the bank had advanced £9,375,027 17s. 10½d. to the public. Its capital stock, however, amounted to only £8,959,995 14s. 8d. This was the first time the bank’s advances to the public exceeded its capital stock. It received interest on those advances and paid dividends to the owners of its capital stock. In other words, the bank now had undivided capital in addition to its divided capital. It has continued to have undivided capital of the same kind ever since. By 1746, the bank had advanced £11,686,800 to the public on various occasions. Its divided capital had been raised to £10,780,000 through various calls and subscriptions. Both sums have remained the same ever since. Under the 4th George III, c. 25, the bank agreed to pay the government £110,000 to renew its charter. The bank would receive neither interest nor repayment. This payment therefore did not increase either of the other two sums.

The dividend of the bank has varied according to the variations in the rate of the interest which it has, at different times, received for the money it had advanced to the public, as well as according to other circumstances. This rate of interest has gradually been reduced from eight to three per cent. For some years past, the bank dividend has been at five and a half per cent.

The bank’s dividend has varied with the interest rate it received on money lent to the public. Other circumstances have also affected the dividend. The interest rate has gradually fallen from eight to three percent. For some years now, the bank’s dividend has been five and a half percent.

The stability of the bank of England is equal to that of the British government. All that it has advanced to the public must be lost before its creditors can sustain any loss. No other banking company in England can be established by act of parliament, or can consist of more than six members. It acts, not only as an ordinary bank, but as a great engine of state. It receives and pays the greater part of the annuities which are due to the creditors of the public; it circulates exchequer bills; and it advances to government the annual amount of the land and malt taxes, which are frequently not paid up till some years thereafter. In these different operations, its duty to the public may sometimes have obliged it, without any fault of its directors, to overstock the circulation with paper money. It likewise discounts merchants’ bills, and has, upon several different occasions, supported the credit of the principal houses, not only of England, but of Hamburgh and Holland. Upon one occasion, in 1763, it is said to have advanced for this purpose, in one week, about £1,600,000, a great part of it in bullion. I do not, however, pretend to warrant either the greatness of the sum, or the shortness of the time. Upon other occasions, this great company has been reduced to the necessity of paying in sixpences.

The Bank of England is as stable as the British government. Everything it has lent to the government must be lost before its creditors can suffer any loss. No other banking company in England can be established by an act of Parliament. Nor can any other banking company in England have more than six members. The Bank acts not only as an ordinary bank but also as a major instrument of government. It receives and pays most of the annuities owed to public creditors. It circulates exchequer bills. It also advances the government the annual amount of the land and malt taxes. These taxes are often not paid in full until some years later. In these operations, the Bank’s duty to the public may sometimes have forced it to put too much paper money into circulation. This may have happened without any fault on the part of its directors. The Bank also discounts merchants’ bills. On several occasions, it has supported the credit of the leading firms in England, Hamburgh, and Holland. On one occasion in 1763, it is said to have advanced about £1,600,000 for this purpose in one week. Much of it was in bullion. I cannot, however, vouch for either the size of the sum or the shortness of the time. On other occasions, this great company has been forced to pay in sixpences.

It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country. That part of his capital which a dealer is obliged to keep by him unemployed and in ready money, for answering occasional demands, is so much dead stock, which, so long as it remains in this situation, produces nothing, either to him or to his country. The judicious operations of banking enable him to convert this dead stock into active and productive stock; into materials to work upon; into tools to work with; and into provisions and subsistence to work for; into stock which produces something both to himself and to his country. The gold and silver money which circulates in any country, and by means of which, the produce of its land and labour is annually circulated and distributed to the proper consumers, is, in the same manner as the ready money of the dealer, all dead stock. It is a very valuable part of the capital of the country, which produces nothing to the country. The judicious operations of banking, by substituting paper in the room of a great part of this gold and silver, enable the country to convert a great part of this dead stock into active and productive stock; into stock which produces something to the country. The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either. The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of waggon-way through the air, enable the country to convert, as it were, a great part of its highways into good pastures, and corn fields, and thereby to increase, very considerably, the annual produce of its land and labour. The commerce and industry of the country, however, it must be acknowledged, though they may be somewhat augmented, cannot be altogether so secure, when they are thus, as it were, suspended upon the Daedalian wings of paper money, as when they travel about upon the solid ground of gold and silver. Over and above the accidents to which they are exposed from the unskilfulness of the conductors of this paper money, they are liable to several others, from which no prudence or skill of those conductors can guard them.

Even the wisest banking practices cannot increase a country’s industry by increasing its capital. They do so by putting more of that capital to productive use than would otherwise be possible. A dealer must keep some of his capital idle as cash to meet occasional demands. This is dead stock. As long as it remains idle, it produces nothing for him or his country. Wise banking practices allow him to turn this dead stock into active, productive stock. He can buy materials to work on, tools to work with, and provisions and means of support to work for. This stock produces something both for him and for his country. The gold and silver money circulating in a country is also dead stock, just like the dealer’s cash. It circulates and distributes the annual produce of the country’s land and labor to the consumers who need it. It is a very valuable part of the country’s capital, but it produces nothing for the country. Wise banking practices replace much of this gold and silver with paper money. This allows the country to turn much of its dead stock into active, productive stock that produces something for the country. The gold and silver money circulating in a country can be compared to a highway. The highway carries all the country’s grass and grain to market, but produces not a single blade of either. Wise banking practices, if I may use so bold a metaphor, provide a kind of roadway through the air. They allow the country, as it were, to turn much of its highways into good pastures and grain fields. In this way, they greatly increase the annual produce of its land and labor. Yet it must be acknowledged that the country’s commerce and industry may grow somewhat through paper money. But they cannot be quite as secure when suspended, as it were, on the Daedalian wings of paper money. They are more secure when they travel on the solid ground of gold and silver. They face dangers from the lack of skill of those who manage paper money. They also face several other dangers that no prudence or skill on the managers’ part can prevent.

An unsuccessful war, for example, in which the enemy got possession of the capital, and consequently of that treasure which supported the credit of the paper money, would occasion a much greater confusion in a country where the whole circulation was carried on by paper, than in one where the greater part of it was carried on by gold and silver. The usual instrument of commerce having lost its value, no exchanges could be made but either by barter or upon credit. All taxes having been usually paid in paper money, the prince would not have wherewithal either to pay his troops, or to furnish his magazines; and the state of the country would be much more irretrievable than if the greater part of its circulation had consisted in gold and silver. A prince, anxious to maintain his dominions at all times in the state in which he can most easily defend them, ought upon this account to guard not only against that excessive multiplication of paper money which ruins the very banks which issue it, but even against that multiplication of it which enables them to fill the greater part of the circulation of the country with it.

Suppose, for example, that a country loses a war and the enemy captures its capital. The enemy would also seize the treasure that supported confidence in the paper money. This would cause much greater confusion in a country where all money in circulation was paper than in one where most was gold and silver. The usual means of trade would have lost its value, so people could trade only by barter or on credit. Since all taxes had usually been paid in paper money, the ruler would have no means to pay his troops or stock his storehouses. The country’s situation would be much harder to recover from than if most of its money in circulation had been gold and silver. A ruler who wants to keep his territories as easy to defend as possible at all times should therefore guard against excessive issues of paper money. These can ruin the very banks that issue the money. But he should also guard against issues large enough to let banks fill most of the country’s circulation with paper money.

The circulation of every country may be considered as divided into two different branches; the circulation of the dealers with one another, and the circulation between the dealers and the consumers. Though the same pieces of money, whether paper or metal, may be employed sometimes in the one circulation and sometimes in the other; yet as both are constantly going on at the same time, each requires a certain stock of money, of one kind or another, to carry it on. The value of the goods circulated between the different dealers never can exceed the value of those circulated between the dealers and the consumers; whatever is bought by the dealers being ultimately destined to be sold to the consumers. The circulation between the dealers, as it is carried on by wholesale, requires generally a pretty large sum for every particular transaction. That between the dealers and the consumers, on the contrary, as it is generally carried on by retail, frequently requires but very small ones, a shilling, or even a halfpenny, being often sufficient. But small sums circulate much faster than large ones. A shilling changes masters more frequently than a guinea, and a halfpenny more frequently than a shilling. Though the annual purchases of all the consumers, therefore, are at least equal in value to those of all the dealers, they can generally be transacted with a much smaller quantity of money; the same pieces, by a more rapid circulation, serving as the instrument of many more purchases of the one kind than of the other.

The circulation of money in every country can be divided into two branches. One is the circulation among dealers, and the other is the circulation between dealers and consumers. The same pieces of money, whether paper or metal, may be used in either branch at different times. But both kinds of circulation are always going on at the same time. Each therefore requires a certain stock of money of one kind or another. The value of goods exchanged among dealers can never exceed the value of goods exchanged between dealers and consumers. Everything dealers buy is ultimately intended for sale to consumers. Trade among dealers is carried on wholesale, so each transaction generally requires a fairly large sum. Trade between dealers and consumers, by contrast, is generally carried on at retail. It often requires only very small sums. A shilling, or even a halfpenny, is often enough. But small sums circulate much faster than large ones. A shilling changes hands more often than a guinea, and a halfpenny more often than a shilling. The yearly purchases of all consumers are therefore at least equal in value to those of all dealers. Yet consumers can generally make these purchases with much less money. Because the same pieces of money circulate faster, they can be used for many more consumer purchases than dealer purchases.

Paper money may be so regulated as either to confine itself very much to the circulation between the different dealers, or to extend itself likewise to a great part of that between the dealers and the consumers. Where no bank notes are circulated under £10 value, as in London, paper money confines itself very much to the circulation between the dealers. When a ten pound bank note comes into the hands of a consumer, he is generally obliged to change it at the first shop where he has occasion to purchase five shillings worth of goods; so that it often returns into the hands of a dealer before the consumer has spent the fortieth part of the money. Where bank notes are issued for so small sums as 20s. as in Scotland, paper money extends itself to a considerable part of the circulation between dealers and consumers. Before the Act of parliament which put a stop to the circulation of ten and five shilling notes, it filled a still greater part of that circulation. In the currencies of North America, paper was commonly issued for so small a sum as a shilling, and filled almost the whole of that circulation. In some paper currencies of Yorkshire, it was issued even for so small a sum as a sixpence.

Paper money can be regulated so that it circulates mostly between dealers, or also between dealers and consumers. In London, no banknotes worth less than £10 circulate, so paper money circulates mostly between dealers. When a consumer receives a £10 note, he generally has to change it at the first shop where he buys five shillings’ worth of goods. So the note often returns to a dealer before the consumer has spent one-fortieth of its value. In Scotland, banknotes are issued for sums as small as 20 shillings. There, paper money accounts for a considerable part of the money circulating between dealers and consumers. Before the Act of Parliament stopped the circulation of ten and five shilling notes, paper money accounted for an even greater part. In North America, paper money was commonly issued for sums as small as a shilling. It accounted for almost all the money circulating between dealers and consumers. In some Yorkshire paper currencies, notes were issued for sums as small as sixpence.

Where the issuing of bank notes for such very small sums is allowed, and commonly practised, many mean people are both enabled and encouraged to become bankers. A person whose promissory note for £5, or even for 20s. would be rejected by every body, will get it to be received without scruple when it is issued for so small a sum as a sixpence. But the frequent bankruptcies to which such beggarly bankers must be liable, may occasion a very considerable inconveniency, and sometimes even a very great calamity, to many poor people who had received their notes in payment.

Where issuing banknotes for very small sums is allowed and common, many people of modest means can become bankers and are encouraged to do so. Everyone would reject a promissory note for £5 or even 20 shillings from such a person. Yet people will accept the same person’s note without hesitation if it is issued for as little as sixpence. But such poor bankers are liable to go bankrupt frequently. Their bankruptcies may cause considerable inconvenience, and sometimes even great hardship, to many poor people who have accepted their notes as payment.

It were better, perhaps, that no bank notes were issued in any part of the kingdom for a smaller sum than £5. Paper money would then, probably, confine itself, in every part of the kingdom, to the circulation between the different dealers, as much as it does at present in London, where no bank notes are issued under £10 value; £5 being, in most part of the kingdom, a sum which, though it will purchase, perhaps, little more than half the quantity of goods, is as much considered, and is as seldom spent all at once, as £10 are amidst the profuse expense of London.

Perhaps it would be better if no bank notes worth less than £5 were issued anywhere in the kingdom. Paper money would then probably circulate mainly between dealers throughout the kingdom, as it now does in London. There, no bank notes worth less than £10 are issued. In most of the kingdom, £5 may buy little more than half as many goods as £10. Even so, people value £5 as much and spend it all at once as rarely as they do £10 amid London's lavish spending.

Where paper money, it is to be observed, is pretty much confined to the circulation between dealers and dealers, as at London, there is always plenty of gold and silver. Where it extends itself to a considerable part of the circulation between dealers and consumers, as in Scotland, and still more in North America, it banishes gold and silver almost entirely from the country; almost all the ordinary transactions of its interior commerce being thus carried on by paper. The suppression of ten and five shilling bank notes, somewhat relieved the scarcity of gold and silver in Scotland; and the suppression of twenty shilling notes will probably relieve it still more. Those metals are said to have become more abundant in America, since the suppression of some of their paper currencies. They are said, likewise, to have been more abundant before the institution of those currencies.

Where paper money is largely confined to transactions between dealers, as in London, gold and silver are always plentiful. But paper money also accounts for a considerable share of transactions between dealers and consumers in Scotland. This is even more true in North America. In these places, paper money drives gold and silver almost entirely out of the country. Almost all ordinary domestic commerce is thus carried on with paper money. Banning ten- and five-shilling banknotes somewhat eased the shortage of gold and silver in Scotland. Banning twenty-shilling notes will probably ease it still more. Gold and silver are said to have become more plentiful in America since some paper currencies were banned. They are also said to have been more plentiful before those currencies were introduced.

Though paper money should be pretty much confined to the circulation between dealers and dealers, yet banks and bankers might still be able to give nearly the same assistance to the industry and commerce of the country, as they had done when paper money filled almost the whole circulation. The ready money which a dealer is obliged to keep by him, for answering occasional demands, is destined altogether for the circulation between himself and other dealers of whom he buys goods. He has no occasion to keep any by him for the circulation between himself and the consumers, who are his customers, and who bring ready money to him, instead of taking any from him. Though no paper money, therefore, was allowed to be issued, but for such sums as would confine it pretty much to the circulation between dealers and dealers; yet partly by discounting real bills of exchange, and partly by lending upon cash-accounts, banks and bankers might still be able to relieve the greater part of those dealers from the necessity of keeping any considerable part of their stock by them unemployed, and in ready money, for answering occasional demands. They might still be able to give the utmost assistance which banks and bankers can with propriety give to traders of every kind.

Even if paper money were largely confined to transactions between dealers, banks and bankers could still support the country’s industry and commerce. Their support could be nearly as great as when paper money made up almost all the money in circulation. A dealer must keep cash on hand to meet occasional demands. This cash is intended entirely for transactions with other dealers from whom the dealer buys goods. The dealer has no need to keep cash for transactions with customers. Customers bring cash to the dealer rather than taking it away. Suppose, then, that paper money could be issued only in amounts that largely confined its use to transactions between dealers. Banks and bankers could still help most dealers avoid keeping a substantial part of their capital idle as cash for occasional demands. They could do this partly by discounting genuine bills of exchange and partly by lending through cash accounts. They could still give traders of every kind the greatest assistance that banks and bankers can properly provide.

To restrain private people, it may be said, from receiving in payment the promissory notes of a banker for any sum, whether great or small, when they themselves are willing to receive them; or, to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty, which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respect a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as or the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.

It may be argued that such restrictions violate natural liberty. They prevent private people from accepting a banker's promissory notes as payment for any sum, large or small, even when they are willing to accept them. Or they prevent a banker from issuing such notes when all his neighbors are willing to accept them. The law's proper role is to support natural liberty, not violate it. Such regulations may no doubt be considered a violation of natural liberty in some respects. But the exercise of natural liberty by a few individuals may endanger the security of the whole society. The laws of all governments, from the freest to the most despotic, do and should restrict such actions. The requirement to build party walls to prevent fire from spreading is a violation of natural liberty. It is exactly the same kind of violation as the proposed banking regulations.

A paper money, consisting in bank notes, issued by people of undoubted credit, payable upon demand, without any condition, and, in fact, always readily paid as soon as presented, is, in every respect, equal in value to gold and silver money, since gold and silver money can at anytime be had for it. Whatever is either bought or sold for such paper, must necessarily be bought or sold as cheap as it could have been for gold and silver.

Paper money can consist of banknotes issued by people whose credit is beyond doubt. The notes must be payable on demand, without conditions, and always paid promptly when presented. Such paper money is equal in value to gold and silver money in every respect. This is because it can be exchanged for gold and silver money at any time. Anything bought or sold with such paper money must be just as cheap as it would be with gold or silver.

The increase of paper money, it has been said, by augmenting the quantity, and consequently diminishing the value, of the whole currency, necessarily augments the money price of commodities. But as the quantity of gold and silver, which is taken from the currency, is always equal to the quantity of paper which is added to it, paper money does not necessarily increase the quantity of the whole currency. From the beginning of the last century to the present time, provisions never were cheaper in Scotland than in 1759, though, from the circulation of ten and five shilling bank notes, there was then more paper money in the country than at present. The proportion between the price of provisions in Scotland and that in England is the same now as before the great multiplication of banking companies in Scotland. Corn is, upon most occasions, fully as cheap in England as in France, though there is a great deal of paper money in England, and scarce any in France. In 1751 and 1752, when Mr Hume published his Political Discourses, and soon after the great multiplication of paper money in Scotland, there was a very sensible rise in the price of provisions, owing, probably, to the badness of the seasons, and not to the multiplication of paper money.

It has been said that increasing paper money necessarily raises the money prices of goods. According to this argument, paper money increases the total amount of currency and therefore reduces its value. But the amount of gold and silver removed from circulation is always equal to the amount of paper money added. So paper money does not necessarily increase the total amount of currency. From the beginning of the last century to the present, food was never cheaper in Scotland than in 1759. Yet ten and five shilling bank notes were then in circulation, and Scotland had more paper money than it has now. The ratio of food prices in Scotland to those in England remains the same as before banking companies multiplied greatly in Scotland. Grain is usually at least as cheap in England as in France. Yet England has a great deal of paper money, while France has hardly any. In 1751 and 1752, Mr Hume published his Political Discourses, soon after paper money had greatly increased in Scotland. Food prices rose noticeably at that time, probably because of bad growing seasons, not the increase in paper money.

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

It would be different, however, with paper money made up of promissory notes under certain conditions. Immediate payment might depend in any way on the goodwill of those who issued the notes. Or it might depend on a condition that the holder could not always meet. Or payment might not be due until a certain number of years had passed, with no interest paid in the meantime. Such paper money would no doubt be worth less than gold and silver. The difference would depend on how difficult or uncertain people thought it was to obtain immediate payment. It would also depend on how far in the future payment was due.

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

Some years ago, Scotland’s banking companies used to include what they called an optional clause in their banknotes. Under this clause, they promised to pay the bearer either when the note was presented or, at the directors’ choice, six months later. If payment was delayed, they would also pay the legal interest for those six months. The directors of some banks sometimes used this optional clause. They also sometimes threatened to use it against people who demanded gold and silver for a considerable number of notes. They made this threat unless those people would accept only part of what they demanded. At that time, these banknotes made up by far the greater part of Scotland’s currency. The uncertainty of payment necessarily reduced their value below that of gold and silver coins. This abuse prevailed chiefly in 1762, 1763, and 1764. During that time, the exchange rate between London and Carlisle was at par. Yet the rate between London and Dumfries was sometimes four percent against Dumfries, although Dumfries is less than thirty miles from Carlisle. In Carlisle, bills were paid in gold and silver. In Dumfries, however, they were paid in Scottish banknotes. The uncertainty of exchanging these notes for gold and silver coins had reduced their value four percent below that of the coins. The same act of parliament that abolished ten and five shilling banknotes also abolished the optional clause. This restored the exchange between England and Scotland to its natural rate, or whatever rate resulted from trade and remittances.

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

In Yorkshire, the payment of a paper note for as little as sixpence sometimes depended on a condition. The holder had to bring change for a guinea to the person who issued the note. Holders could often find this condition very difficult to meet. It must have reduced the value of the paper currency below that of gold and silver money. Parliament therefore passed a law declaring all such conditions unlawful. It also banned all promissory notes payable to the bearer for less than 20 shillings, as it had done in Scotland.

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

North American paper currencies were not banknotes payable to the bearer on demand. They were government paper that could not be redeemed until several years after it was issued. The colonial governments paid no interest to the holders of this paper. Yet they declared it legal tender for its full face value and made it so in practice. But suppose the colony’s promise to pay was perfectly secure. In a country where interest is six percent, £100 payable in fifteen years is worth little more than £40 in cash today. A creditor might have lent £100 in cash. To force that creditor to accept the paper as full payment was an act of violent injustice. Perhaps no other government claiming to be free has attempted anything like it. It plainly bears the marks of what the honest and straightforward Doctor Douglas assures us it originally was: a scheme by fraudulent debtors to cheat their creditors. When the government of Pennsylvania first issued paper money in 1722, it claimed to make the paper equal in value to gold and silver. It imposed penalties on anyone who charged different prices for goods depending on whether the buyer paid in colonial paper or in gold and silver. This regulation was just as tyrannical as the one it was meant to support, but much less effective. A law can make a shilling legal tender for a guinea. It can order the courts to release a debtor who has offered a shilling in payment of a guinea. But no law can force a person selling goods to accept a shilling as equal to a guinea in their price, when that person is free to sell or not. Despite such regulations, exchange rates with Great Britain showed that £100 sterling was sometimes valued at £130 in currency in some colonies. In others, it was valued at as much as £1100 in currency. These differences arose from the different amounts of paper the colonies issued. They also arose from differences in how far away, and how likely, final payment and redemption were.

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

Therefore, no law could be fairer than the act of parliament that the colonies complained about so unjustly. The act declared that no paper currency issued there in the future would be legal tender.

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

Pennsylvania was always more moderate in issuing paper money than any of our other colonies. Its paper currency is therefore said never to have fallen below the value of the gold and silver that circulated in the colony before paper money was first issued. Before that first issue, the colony had raised the face value of its coins. By an act of its assembly, 5 shillings sterling were to count as 6 shillings and 3 pence in the colonies. Later, they were to count as 6 shillings and 8 pence. A pound in colonial currency was therefore worth more than 30 percent less than £1 sterling, even when the currency was gold and silver. When the currency was converted to paper, it was seldom worth much more than 30 percent less than £1 sterling. The stated reason for raising the face value of the coins was to prevent gold and silver from being exported. Equal amounts of those metals would count as larger sums in the colony than in the mother country. But the prices of all goods from the mother country rose exactly in proportion to the increase in the coins' face value. As a result, gold and silver were exported as quickly as ever.

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

Each colony accepted its paper money at its full issue value in payment of provincial taxes. This use necessarily gave the paper money additional value. That value was above what it would otherwise have had, given the actual or supposed time until its final repayment and redemption. This additional value was greater or smaller depending on how much the paper issued exceeded what could be used to pay taxes in the colony that issued it. In all the colonies, the amount issued was far greater than could be used this way.

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

A prince might require a certain proportion of his taxes to be paid in a particular kind of paper money. This could give the paper money some value, even if the time of its final redemption depended entirely on the prince’s will. The bank issuing the paper might keep its supply somewhat below the amount that could easily be used to pay taxes. Demand for it might then be strong enough for it to sell at a premium. It might sell for somewhat more than the amount of gold or silver currency for which it was issued. Some people explain what is called the agio of the bank of Amsterdam in this way. The agio is the premium at which bank money sells over ordinary currency. They offer this explanation even though, they claim, owners cannot withdraw bank money whenever they wish. Most foreign bills of exchange must be paid in bank money, through a transfer in the bank’s books. They allege that the bank’s directors keep the total supply of bank money below the demand created by this use. For this reason, they say, bank money sells at a premium, or bears an agio, of four or five percent. That is, it sells for four or five percent more than the same nominal amount of the country’s gold and silver currency. This account of the bank of Amsterdam, however, will later appear to be largely fanciful.

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

A paper currency may fall below the value of gold and silver coin. But this does not reduce the value of those metals. Nor does it cause the same quantities of gold and silver to exchange for fewer goods of any other kind. The relative value of gold and silver and other goods does not depend on the nature or quantity of any paper money circulating in a particular country. It depends, in every case, on the richness or poverty of the mines supplying those metals to the great market of the commercial world at that time. It depends on how much labor is needed to bring a certain quantity of gold and silver to market, compared with the labor needed to bring a certain quantity of any other goods to market.

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

If bankers are forbidden to issue circulating notes, or notes payable to the bearer, below a certain amount, their business can otherwise be completely free without endangering the public. They must also be required to pay such notes immediately and unconditionally whenever they are presented. The recent increase in banking companies throughout both parts of the united kingdom has alarmed many people. Yet it increases public security rather than reducing it. It forces all banks to conduct their business more carefully. They must keep their notes in circulation in due proportion to their cash reserves. In this way, they protect themselves against malicious runs that so many rivals are always ready to bring upon them. The increase in banking companies also limits each company's circulation to a smaller area and reduces the number of its notes in circulation. Because the total circulation is divided among more companies, any one company's failure is less serious for the public. Such failures must sometimes happen in the normal course of things. Free competition also forces all bankers to be more generous in their dealings with customers, or risk losing them to rivals. In general, if any branch of trade or division of labour benefits the public, freer and more widespread competition will always increase that benefit.