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An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith

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BOOK II.

OF THE NATURE, ACCUMULATION, AND EMPLOYMENT OF STOCK.

INTRODUCTION.

In that rude state of society, in which there is no division of
labour, in which exchanges are seldom made, and in which every man
provides every thing for himself, it is not necessary that any stock
should be accumulated, or stored up before-hand, in order to carry on
the business of the society. Every man endeavours to supply, by his
own industry, his own occasional wants, as they occur. When he is
hungry, he goes to the forest to hunt; when his coat is worn out, he
clothes himself with the skin of the first large animal he kills: and
when his hut begins to go to ruin, he repairs it, as well as he can,
with the trees and the turf that are nearest it.

But when the division of labour has once been thoroughly introduced,
the produce of a man's own labour can supply but a very small part of
his occasional wants. The far greater part of them are supplied by the
produce of other men's labour, which he purchases with the produce,
or, what is the same thing, with the price of the produce, of his own.
But this purchase cannot be made till such time as the produce of his
own labour has not only been completed, but sold. A stock of goods of
different kinds, therefore, must be stored up somewhere, sufficient to
maintain him, and to supply him with the materials and tools of his
work, till such time at least as both these events can be brought
about. A weaver cannot apply himself entirely to his peculiar
business, unless there is before-hand stored up somewhere, either in
his own possession, or in that of some other person, a stock
sufficient to maintain him, and to supply him with the materials and
tools of his work, till he has not only completed, but sold his web.
This accumulation must evidently be previous to his applying his
industry for so long a time to such a peculiar business.

As the accumulation of stock must, in the nature of things, be
previous to the division of labour, so labour can be more and more
subdivided in proportion only as stock is previously more and more
accumulated. The quantity of materials which the same number of people
can work up, increases in a great proportion as labour comes to be
more and more subdivided; and as the operations of each workman are
gradually reduced to a greater degree of simplicity, a variety of new
machines come to be invented for facilitating and abridging those
operations. As the division of labour advances, therefore, in order to
give constant employment to an equal number of workmen, an equal stock
of provisions, and a greater stock of materials and tools than what
would have been necessary in a ruder state of things, must be
accumulated before-hand. But the number of workmen in every branch of
business generally increases with the division of labour in that
branch; or rather it is the increase of their number which enables
them to class and subdivide themselves in this manner.

As the accumulation of stock is previously necessary for carrying on
this great improvement in the productive powers of labour, so that
accumulation naturally leads to this improvement. The person who
employs his stock in maintaining labour, necessarily wishes to employ
it in such a manner as to produce as great a quantity of work as
possible. He endeavours, therefore, both to make among his workmen the
most proper distribution of employment, and to furnish them with the
best machines which he can either invent or afford to purchase. His
abilities, in both these respects, are generally in proportion to the
extent of his stock, or to the number of people whom it can employ.
The quantity of industry, therefore, not only increases in every
country with the increase of the stock which employs it, but, in
consequence of that increase, the same quantity of industry produces a
much greater quantity of work.

Such are in general the effects of the increase of stock upon industry
and its productive powers.

In the following book, I have endeavoured to explain the nature of
stock, the effects of its accumulation into capital of different
kinds, and the effects of the different employments of those capitals.
This book is divided into five chapters. In the first chapter, I have
endeavoured to shew what are the different parts or branches into
which the stock, either of an individual, or of a great society,
naturally divides itself. In the second, I have endeavoured to explain
the nature and operation of money, considered as a particular branch
of the general stock of the society. The stock which is accumulated
into a capital, may either be employed by the person to whom it
belongs, or it may be lent to some other person. In the third and
fourth chapters, I have endeavoured to examine the manner in which it
operates in both these situations. The fifth and last chapter treats
of the different effects which the different employments of capital
immediately produce upon the quantity, both of national industry, and
of the annual produce of land and labour.

CHAPTER I.

OF THE DIVISION OF STOCK.

When the stock which a man possesses is no more than sufficient to
maintain him for a few days or a few weeks, he seldom thinks of
deriving any revenue from it. He consumes it as sparingly as he can,
and endeavours, by his labour, to acquire something which may supply
its place before it be consumed altogether. His revenue is, in this
case, derived from his labour only. This is the state of the greater
part of the labouring poor in all countries.

But when he possesses stock sufficient to maintain him for months or
years, he naturally endeavours to derive a revenue from the greater
part of it, reserving only so much for his immediate consumption as
may maintain him till this revenue begins to come in. His whole stock,
therefore, is distinguished into two parts. That part which he expects
is to afford him this revenue is called his capital. The other is that
which supplies his immediate consumption, and which consists either,
first, in that portion of his whole stock which was originally
reserved for this purpose; or, secondly, in his revenue, from whatever
source derived, as it gradually comes in; or, thirdly, in such things
as had been purchased by either of these in former years, and which
are not yet entirely consumed, such as a stock of clothes, household
furniture, and the like. In one or other, or all of these three
articles, consists the stock which men commonly reserve for their own
immediate consumption.

There are two different ways in which a capital may be employed so as
to yield a revenue or profit to its employer.

First, it maybe employed in raising, manufacturing, or purchasing
goods, and selling them again with a profit. The capital employed in
this manner yields no revenue or profit to its employer, while it
either remains in his possession, or continues in the same shape. The
goods of the merchant yield him no revenue or profit till he sells
them for money, and the money yields him as little till it is again
exchanged for goods. His capital is continually going from him in one
shape, and returning to him in another; and it is only by means of
such circulation, or successive changes, that it can yield him any
profit. Such capitals, therefore, may very properly be called
circulating capitals.

Secondly, it may be employed in the improvement of land, in the
purchase of useful machines and instruments of trade, or in such like
things as yield a revenue or profit without changing masters, or
circulating any further. Such capitals, therefore, may very properly
be called fixed capitals.

Different occupations require very different proportions between the
fixed and circulating capitals employed in them.

The capital of a merchant, for example, is altogether a circulating
capital. He has occasion for no machines or instruments of trade,
unless his shop or warehouse be considered as such.

Some part of the capital of every master artificer or manufacturer
must be fixed in the instruments of his trade. This part, however, is
very small in some, and very great in others, A master tailor requires
no other instruments of trade but a parcel of needles. Those of the
master shoemaker are a little, though but a very little, more
expensive. Those of the weaver rise a good deal above those of the
shoemaker. The far greater part of the capital of all such master
artificers, however, is circulated either in the wages of their
workmen, or in the price of their materials, and repaid, with a
profit, by the price of the work.

In other works a much greater fixed capital is required. In a great
iron-work, for example, the furnace for melting the ore, the forge,
the slit-mill, are instruments of trade which cannot be erected
without a very great expense. In coal works, and mines of every kind,
the machinery necessary, both for drawing out the water, and for other
purposes, is frequently still more expensive.

That part of the capital of the farmer which is employed in the
instruments of agriculture is a fixed, that which is employed in the
wages and maintenance of his labouring servants is a circulating
capital. He makes a profit of the one by keeping it in his own
possession, and of the other by parting with it. The price or value of
his labouring cattle is a fixed capital, in the same manner as that of
the instruments of husbandry; their maintenance is a circulating
capital, in the same manner as that of the labouring servants. The
farmer makes his profit by keeping the labouring cattle, and by
parting with their maintenance. Both the price and the maintenance of
the cattle which are bought in and fattened, not for labour, but for
sale, are a circulating capital. The farmer makes his profit by
parting with them. A flock of sheep or a herd of cattle, that, in a
breeding country, is brought in neither for labour nor for sale, but
in order to make a profit by their wool, by their milk, and by their
increase, is a fixed capital. The profit is made by keeping them.
Their maintenance is a circulating capital. The profit is made by
parting with it; and it comes back with both its own profit and the
profit upon the whole price of the cattle, in the price of the wool,
the milk, and the increase. The whole value of the seed, too, is
properly a fixed capital. Though it goes backwards and forwards
between the ground and the granary, it never changes masters, and
therefore does not properly circulate. The farmer makes his profit,
not by its sale, but by its increase.

The general stock of any country or society is the same with that of
all its inhabitants or members; and, therefore, naturally divides
itself into the same three portions, each of which has a distinct
function or office.

The first is that portion which is reserved for immediate consumption,
and of which the characteristic is, that it affords no revenue or
profit. It consists in the stock of food, clothes, household
furniture, etc. which have been purchased by their proper consumers,
but which are not yet entirely consumed. The whole stock of mere
dwelling-houses, too, subsisting at anyone time in the country, make a
part of this first portion. The stock that is laid out in a house, if
it is to be the dwelling-house of the proprietor, ceases from that
moment to serve in the function of a capital, or to afford any revenue
to its owner. A dwelling-house, as such, contributes nothing to the
revenue of its inhabitant; and though it is, no doubt, extremely
useful to him, it is as his clothes and household furniture are useful
to him, which, however, make a part of his expense, and not of his
revenue. If it is to be let to a tenant for rent, as the house itself
can produce nothing, the tenant must always pay the rent out of some
other revenue, which he derives, either from labour, or stock, or
land. Though a house, therefore, may yield a revenue to its
proprietor, and thereby serve in the function of a capital to him, it
cannot yield any to the public, nor serve in the function of a capital
to it, and the revenue of the whole body of the people can never be in
the smallest degree increased by it. Clothes and household furniture,
in the same manner, sometimes yield a revenue, and thereby serve in
the function of a capital to particular persons. In countries where
masquerades are common, it is a trade to let out masquerade dresses
for a night. Upholsterers frequently let furniture by the month or by
the year. Undertakers let the furniture of funerals by the day and by
the week. Many people let furnished houses, and get a rent, not only
for the use of the house, but for that of the furniture. The revenue,
however, which is derived from such things, must always be ultimately
drawn from some other source of revenue. Of all parts of the stock,
either of an individual or of a society, reserved for immediate
consumption, what is laid out in houses is most slowly consumed. A
stock of clothes may last several years; a stock of furniture half a
century or a century; but a stock of houses, well built and properly
taken care of, may last many centuries. Though the period of their
total consumption, however, is more distant, they are still as really
a stock reserved for immediate consumption as either clothes or
household furniture.

The second of the three portions into which the general stock of the
society divides itself, is the fixed capital; of which the
characteristic is, that it affords a revenue or profit without
circulating or changing masters. It consists chiefly of the four
following articles.

First, of all useful machines and instruments of trade, which
facilitate and abridge labour.

Secondly, of all those profitable buildings which are the means of
procuring a revenue, not only to the proprietor who lets them for a
rent, but to the person who possesses them, and pays that rent for
them; such as shops, warehouses, work-houses, farm-houses, with all
their necessary buildings, stables, granaries, etc. These are very
different from mere dwelling-houses. They are a sort of instruments of
trade, and may be considered in the same light.

Thirdly, of the improvements of land, of what has been profitably laid
out in clearing, draining, inclosing, manuring, and reducing it into
the condition most proper for tillage and culture. An improved farm
may very justly be regarded in the same light as those useful machines
which facilitate and abridge labour, and by means of which an equal
circulating capital can afford a much greater revenue to its employer.
An improved farm is equally advantageous and more durable than any of
those machines, frequently requiring no other repairs than the most
profitable application of the farmer's capital employed in cultivating
it.

Fourthly, of the acquired and useful abilities of all the inhabitants
and members of the society. The acquisition of such talents, by the
maintenance of the acquirer during his education, study, or
apprenticeship, always costs a real expense, which is a capital fixed
and realized, as it were, in his person. Those talents, as they make a
part of his fortune, so do they likewise that of the society to which
he belongs. The improved dexterity of a workman may be considered in
the same light as a machine or instrument of trade which facilitates
and abridges labour, and which, though it costs a certain expense,
repays that expense with a profit.

The third and last of the three portions into which the general stock
of the society naturally divides itself, is the circulating capital,
of which the characteristic is, that it affords a revenue only by
circulating or changing masters. It is composed likewise of four
parts.

First, of the money, by means of which all the other three are
circulated and distributed to their proper consumers.

Secondly, of the stock of provisions which are in the possession of
the butcher, the grazier, the farmer, the corn-merchant, the brewer,
etc. and from the sale of which they expect to derive a profit.

Thirdly, of the materials, whether altogether rude, or more or less
manufactured, of clothes, furniture, and building which are not yet
made up into any of those three shapes, but which remain in the hands
of the growers, the manufacturers, the mercers, and drapers, the
timber-merchants, the carpenters and joiners, the brick-makers, etc.

Fourthly, and lastly, of the work which is made up and completed, but
which is still in the hands of the merchant and manufacturer, and not
yet disposed of or distributed to the proper consumers; such as the
finished work which we frequently find ready made in the shops of the
smith, the cabinet-maker, the goldsmith, the jeweller, the
china-merchant, etc. The circulating capital consists, in this manner,
of the provisions, materials, and finished work of all kinds that are
in the hands of their respective dealers, and of the money that is
necessary for circulating and distributing them to those who are
finally to use or to consume them.

Of these four parts, three--provisions, materials, and finished work,
are either annually or in a longer or shorter period, regularly
withdrawn from it, and placed either in the fixed capital, or in the
stock reserved for immediate consumption.

Every fixed capital is both originally derived from, and requires to
be continually supported by, a circulating capital. All useful
machines and instruments of trade are originally derived from a
circulating capital, which furnishes the materials of which they are
made, and the maintenance of the workmen who make them. They require,
too, a capital of the same kind to keep them in constant repair.

No fixed capital can yield any revenue but by means of a circulating
capital The most useful machines and instruments of trade will produce
nothing, without the circulating capital, which affords the materials
they are employed upon, and the maintenance of the workmen who employ
them. Land, however improved, will yield no revenue without a
circulating capital, which maintains the labourers who cultivate and
collect its produce.

To maintain and augment the stock which maybe reserved for immediate
consumption, is the sole end and purpose both of the fixed and
circulating capitals. It is this stock which feeds, clothes, and
lodges the people. Their riches or poverty depend upon the abundant or
sparing supplies which those two capitals can afford to the stock
reserved for immediate consumption.

So great a part of the circulating capital being continually withdrawn
from it, in order to be placed in the other two branches of the
general stock of the society, it must in its turn require continual
supplies without which it would soon cease to exist. These supplies
are principally drawn from three sources; the produce of land, of
mines, and of fisheries. These afford continual supplies of provisions
and materials, of which part is afterwards wrought up into finished
work and by which are replaced the provisions, materials, and finished
work, continually withdrawn from the circulating capital. From mines,
too, is drawn what is necessary for maintaining and augmenting that
part of it which consists in money. For though, in the ordinary course
of business, this part is not, like the other three, necessarily
withdrawn from it, in order to be placed in the other two branches of
the general stock of the society, it must, however, like all other
things, be wasted and worn out at last, and sometimes, too, be either
lost or sent abroad, and must, therefore, require continual, though no
doubt much smaller supplies.

Lands, mines, and fisheries, require all both a fixed and circulating
capital to cultivate them; and their produce replaces, with a profit
not only those capitals, but all the others in the society. Thus the
farmer annually replaces to the manufacturer the provisions which he
had consumed, and the materials which he had wrought up the year
before; and the manufacturer replaces to the farmer the finished work
which he had wasted and worn out in the same time. This is the real
exchange that is annually made between those two orders of people,
though it seldom happens that the rude produce of the one, and the
manufactured produce of the other, are directly bartered for one
another; because it seldom happens that the farmer sells his corn and
his cattle, his flax and his wool, to the very same person of whom he
chuses to purchase the clothes, furniture, and instruments of trade,
which he wants. He sells, therefore, his rude produce for money, with
which he can purchase, wherever it is to be had, the manufactured
produce he has occasion for. Land even replaces, in part at least, the
capitals with which fisheries and mines are cultivated. It is the
produce of land which draws the fish from the waters; and it is the
produce of the surface of the earth which extracts the minerals from
its bowels.

The produce of land, mines, and fisheries, when their natural
fertility is equal, is in proportion to the extent and proper
application of the capitals employed about them. When the capitals are
equal, and equally well applied, it is in proportion to their natural
fertility.

In all countries where there is a tolerable security, every man of
common understanding will endeavour to employ whatever stock he can
command, in procuring either present enjoyment or future profit. If it
is employed in procuring present enjoyment, it is a stock reserved for
immediate consumption. If it is employed in procuring future profit,
it must procure this profit either by staying with him, or by going
from him. In the one case it is a fixed, in the other it is a
circulating capital. A man must be perfectly crazy, who, where there
is a tolerable security, does not employ all the stock which he
commands, whether it be his own, or borrowed of other people, in some
one or other of those three ways.

In those unfortunate countries, indeed, where men are continually
afraid of the violence of their superiors, they frequently bury or
conceal a great part of their stock, in order to have it always at
hand to carry with them to some place of safety, in case of their
being threatened with any of those disasters to which they consider
themselves at all times exposed. This is said to be a common practice
in Turkey, in Indostan, and, I believe, in most other governments of
Asia. It seems to have been a common practice among our ancestors
during the violence of the feudal government. Treasure-trove was, in
these times, considered as no contemptible part of the revenue of the
greatest sovereigns in Europe. It consisted in such treasure as was
found concealed in the earth, and to which no particular person could
prove any right. This was regarded, in those times, as so important an
object, that it was always considered as belonging to the sovereign,
and neither to the finder nor to the proprietor of the land, unless
the right to it had been conveyed to the latter by an express clause
in his charter. It was put upon the same footing with gold and silver
mines, which, without a special clause in the charter, were never
supposed to be comprehended in the general grant of the lands, though
mines of lead, copper, tin, and coal were, as things of smaller
consequence.

CHAPTER II.

OF MONEY, CONSIDERED AS A PARTICULAR BRANCH OF THE GENERAL STOCK OF
THE SOCIETY, OR OF THE EXPENSE OF MAINTAINING THE 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.

Since this is the case, it has been observed, with regard to every
particular commodity, taken separately, it must be so with regard to
all the commodities which compose the whole annual produce of the land
and labour of every country, taken complexly. The whole price or
exchangeable value of that annual produce must resolve itself into the
same three parts, and be parcelled out among the different inhabitants
of the country, either as the wages of their labour, the profits of
their stock, or the rent of their land.

But though the whole value of the annual produce of the land and
labour of every country, is thus divided among, and constitutes a
revenue to, its different inhabitants; yet, as in the rent of a
private estate, we distinguish between the gross rent and the neat
rent, so may we likewise in the revenue of all the inhabitants of a
great country.

The gross rent of a private estate comprehends whatever is paid by the
farmer; the neat rent, what remains free to the landlord, after
deducting the expense of management, of repairs, and all other
necessary charges; or what, without hurting his estate, he can afford
to place in his stock reserved for immediate consumption, or to spend
upon his table, equipage, the ornaments of his house and furniture,
his private enjoyments and amusements. His real wealth is in
proportion, not to his gross, but to his neat rent.

The gross revenue of all the inhabitants of a great country
comprehends the whole annual produce of their land and labour; the
neat revenue, what remains free to them, after deducting the expense
of maintaining first, their fixed, and, secondly, their circulating
capital, or what, without encroaching upon their capital, they can
place in their stock reserved for immediate consumption, or spend upon
their subsistence, conveniencies, and amusements. Their real wealth,
too, is in proportion, not to their gross, but to their neat revenue.

The whole expense of maintaining the fixed capital must evidently be
excluded from the neat revenue of the society. Neither the materials
necessary for supporting their useful machines and instruments of
trade, their profitable buildings, etc. nor the produce of the labour
necessary for fashioning those materials into the proper form, can
ever make any part of it. The price of that labour may indeed make a
part of it; as the workmen so employed may place the whole value of
their wages in their stock reserved for immediate consumption. But in
other sorts of labour, both the price and the produce go to this
stock; the price to that of the workmen, the produce to that of other
people, whose subsistence, conveniencies, and amusements, are
augmented by the labour of those workmen.

The intention of the fixed capital is to increase the productive
powers of labour, or to enable the same number of labourers to perform
a much greater quantity of work. In a farm where all the necessary
buildings, fences, drains, communications, etc. are in the most
perfect good order, the same number of labourers and labouring cattle
will raise a much greater produce, than in one of equal extent and
equally good ground, but not furnished with equal conveniencies. In
manufactures, the same number of hands, assisted with the best
machinery, will work up a much greater quantity of goods than with
more imperfect instruments of trade. The expense which is properly
laid out upon a fixed capital of any kind, is always repaid with great
profit, and increases the annual produce by a much greater value than
that of the support which such improvements require. This support,
however, still requires a certain portion of that produce. A certain
quantity of materials, and the labour of a certain number of workmen,
both of which might have been immediately employed to augment the
food, clothing, and lodging, the subsistence and conveniencies of the
society, are thus diverted to another employment, highly advantageous
indeed, but still different from this one. It is upon this account
that all such improvements in mechanics, as enable the same number of
workmen to perform an equal quantity of work with cheaper and simpler
machinery than had been usual before, are always regarded as
advantageous to every society. A certain quantity of materials, and
the labour of a certain number of workmen, which had before been
employed in supporting a more complex and expensive machinery, can
afterwards be applied to augment the quantity of work which that or
any other machinery is useful only for performing. The undertaker of
some great manufactory, who employs a thousand a-year in the
maintenance of his machinery, if he can reduce this expense to five
hundred, will naturally employ the other five hundred in purchasing an
additional quantity of materials, to be wrought up by an additional
number of workmen. The quantity of that work, therefore, which his
machinery was useful only for performing, will naturally be augmented,
and with it all the advantage and conveniency which the society can
derive from that work.

The expense of maintaining the fixed capital in a great country, may
very properly be compared to that of repairs in a private estate. The
expense of repairs may frequently be necessary for supporting the
produce of the estate, and consequently both the gross and the neat
rent of the landlord. When by a more proper direction, however, it can
be diminished without occasioning any diminution of produce, the gross
rent remains at least the same as before, and the neat rent is
necessarily augmented.

But though the whole expense of maintaining the fixed capital is thus
necessarily excluded from the neat revenue of the society, it is not
the same case with that of maintaining the circulating capital. Of the
four parts of which this latter capital is composed, money,
provisions, materials, and finished work, the three last, it has
already been observed, are regularly withdrawn from it, and placed
either in the fixed capital of the society, or in their stock reserved
for immediate consumption. Whatever portion of those consumable goods
is not employed in maintaining the former, goes all to the latter, and
makes a part of the neat revenue of the society. The maintenance of
those three parts of the circulating capital, therefore, withdraws no
portion of the annual produce from the neat revenue of the society,
besides what is necessary for maintaining the fixed capital.

The circulating capital of a society is in this respect different from
that of an individual. That of an individual is totally excluded from
making any part of his neat revenue, which must consist altogether in
his profits. But though the circulating capital of every individual
makes a part of that of the society to which he belongs, it is not
upon that account totally excluded from making a part likewise of
their neat revenue. Though the whole goods in a merchant's shop must
by no means be placed in his own stock reserved for immediate
consumption, they may in that of other people, who, from a revenue
derived from other funds, may regularly replace their value to him,
together with its profits, without occasioning any diminution either
of his capital or of theirs.

Money, therefore, is the only part of the circulating capital of a
society, of which the maintenance can occasion any diminution in their
neat revenue.

The fixed capital, and that part of the circulating capital which
consists in money, so far as they affect the revenue of the society,
bear a very great resemblance to one another.

First, as those machines and instruments of trade, etc. require a
certain expense, first to erect them, and afterwards to support them,
both which expenses, though they make a part of the gross, are
deductions from the neat revenue of the society; so the stock of money
which circulates in any country must require a certain expense, first
to collect it, and afterwards to support it; both which expenses,
though they make a part of the gross, are, in the same manner,
deductions from the neat revenue of the society. A certain quantity of
very valuable materials, gold and silver, and of very curious labour,
instead of augmenting the stock reserved for immediate consumption,
the subsistence, conveniencies, and amusements of individuals, is
employed in supporting that great but expensive instrument of
commerce, by means of which every individual in the society has his
subsistence, conveniencies, and amusements, regularly distributed to
him in their proper proportions.

Secondly, as the machines and instruments of trade, etc. which compose
the fixed capital either of an individual or of a society, make no
part either of the gross or of the neat revenue of either; so money,
by means of which the whole revenue of the society is regularly
distributed among all its different members, makes itself no part of
that revenue. The great wheel of circulation is altogether different
from the goods which are circulated by means of it. The revenue of the
society consists altogether in those goods, and not in the wheel which
circulates them. In computing either the gross or the neat revenue of
any society, we must always, from the whole annual circulation of
money and goods, deduct the whole value of the money, of which not a
single farthing can ever make any part of either.

It is the ambiguity of language only which can make this proposition
appear either doubtful or paradoxical. When properly explained and
understood, it is almost self-evident.

When we talk of any particular sum of money, we sometimes mean nothing
but the metal pieces of which it is composed, and sometimes we include
in our meaning some obscure reference to the goods which can be had in
exchange for it, or to the power of purchasing which the possession of
it conveys. Thus, when we say that the circulating money of England
has been computed at eighteen millions, we mean only to express the
amount of the metal pieces, which some writers have computed, or
rather have supposed, to circulate in that country. But when we say
that a man is worth fifty or a hundred pounds a-year, we mean commonly
to express, not only the amount of the metal pieces which are annually
paid to him, but the value of the goods which he can annually purchase
or consume; we mean commonly to ascertain what is or ought to be his
way of living, or the quantity and quality of the necessaries and
conveniencies of life in which he can with propriety indulge himself.

When, by any particular sum of money, we mean not only to express the
amount of the metal pieces of which it is composed, but to include in
its signification some obscure reference to the goods which can be had
in exchange for them, the wealth or revenue which it in this case
denotes, is equal only to one of the two values which are thus
intimated somewhat ambiguously by the same word, and to the latter
more properly than to the former, to the money's worth more properly
than to the money.

Thus, if a guinea be the weekly pension of a particular person, he can
in the course of the week purchase with it a certain quantity of
subsistence, conveniencies, and amusements. In proportion as this
quantity is great or small, so are his real riches, his real weekly
revenue. His weekly revenue is certainly not equal both to the guinea
and to what can be purchased with it, but only to one or other of
those two equal values, and to the latter more properly than to the
former, to the guinea's worth rather than to the guinea.

If the pension of such a person was paid to him, not in gold, but in a
weekly bill for a guinea, his revenue surely would not so properly
consist in the piece of paper, as in what he could get for it. A
guinea may be considered as a bill for a certain quantity of
necessaries and conveniencies upon all the tradesmen in the
neighbourhood The revenue of the person to whom it is paid, does not
so properly consist in the piece of gold, as in what he can get for
it, or in what he can exchange it for. If it could be exchanged for
nothing, it would, like a bill upon a bankrupt, be of no more value
than the most useless piece of paper.

Though the weekly or yearly revenue of all the different inhabitants
of any country, in the same manner, may be, and in reality frequently
is, paid to them in money, their real riches, however, the real weekly
or yearly revenue of all of them taken together, must always be great
or small, in proportion to the quantity of consumable goods which they
can all of them purchase with this money. The whole revenue of all of
them taken together is evidently not equal to both the money and the
consumable goods, but only to one or other of those two values, and to
the latter more properly than to the former.

Though we frequently, therefore, express a person's revenue by the
metal pieces which are annually paid to him, it is because the amount
of those pieces regulates the extent of his power of purchasing, or
the value of the goods which he can annually afford to consume. We
still consider his revenue as consisting in this power of purchasing
or consuming, and not in the pieces which convey it.

But if this is sufficiently evident, even with regard to an
individual, it is still more so with regard to a society. The amount
of the metal pieces which are annually paid to an individual, is often
precisely equal to his revenue, and is upon that account the shortest
and best expression of its value. But the amount of the metal pieces
which circulate in a society, can never be equal to the revenue of all
its members. As the same guinea which pays the weekly pension of one
man to-day, may pay that of another to-morrow, and that of a third the
day thereafter, the amount of the metal pieces which annually
circulate in any country, must always be of much less value than the
whole money pensions annually paid with them. But the power of
purchasing, or the goods which can successively be bought with the
whole of those money pensions, as they are successively paid, must
always be precisely of the same value with those pensions; as must
likewise be the revenue of the different persons to whom they are
paid. That revenue, therefore, cannot consist in those metal pieces,
of which the amount is so much inferior to its value, but in the power
of purchasing, in the goods which can successively be bought with them
as they circulate from hand to hand.

Money, therefore, the great wheel of circulation, the great instrument
of commerce, like all other instruments of trade, though it makes a
part, and a very valuable part, of the capital, makes no part of the
revenue of the society to which it belongs; and though the metal
pieces of which it is composed, in the course of their annual
circulation, distribute to every man the revenue which properly
belongs to him, they make themselves no part of that revenue.

Thirdly, and lastly, the machines and instruments of trade, etc. which
compose the fixed capital, bear this further resemblance to that part
of the circulating capital which consists in money; that as every
saving in the expense of erecting and supporting those machines, which
does not diminish the introductive powers of labour, is an improvement
of the neat revenue of the society; so every saving in the expense of
collecting and supporting that part of the circulating capital which
consists in money is an improvement of exactly the same kind.

It is sufficiently obvious, and it has partly, too, been explained
already, in what manner every saving in the expense of supporting the
fixed capital is an improvement of the neat revenue of the society.
The whole capital of the undertaker of every work is necessarily
divided between his fixed and his circulating capital. While his whole
capital remains the same, the smaller the one part, the greater must
necessarily be the other. It is the circulating capital which
furnishes the materials and wages of labour, and puts industry into
motion. Every saving, therefore, in the expense of maintaining the
fixed capital, which does not diminish the productive powers of
labour, must increase the fund which puts industry into motion, and
consequently the annual produce of land and labour, the real revenue
of every society.

The substitution of paper in the room of gold and silver money,
replaces a very expensive instrument of commerce with one much less
costly, and sometimes equally convenient. Circulation comes to be
carried on by a new wheel, which it costs less both to erect and to
maintain than the old one. But in what manner this operation is
performed, and in what manner it tends to increase either the gross or
the neat revenue of the society, is not altogether so obvious, and may
therefore require some further explication.

There are several different sorts of paper money; but the circulating
notes of banks and bankers are the species which is best known, and
which seems best adapted for this purpose.

When the people of any particular country have such confidence in the
fortune, probity and prudence of a particular banker, as to believe
that he is always ready to pay upon demand such of his promissory
notes as are likely to be at any time presented to him, those notes
come to have the same currency as gold and silver money, from the
confidence that such money can at any time be had for them.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In pursuance of the 7th Anne, c. 7, the bank advanced and paid into
the exchequer the sum of 400,000; making in all the sum of
1,600,000, which it had advanced upon its original annuity of 96,000
interest, and 4,000 for expense of management. In 1708, therefore,
the credit of government was as good as that of private persons, since
it could borrow at six per cent. interest, the common legal and market
rate of those times. In pursuance of the same act, the bank cancelled
exchequer bills to the amount of 1,775,027: 17s: 10d. 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 3,375,027:17:10d.

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

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

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

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

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

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

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

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

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

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