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tegwick fecc2fd4fa feat(llm): add LLM integration module with OpenRouter and Claude Code adapters 
Implements markitect/llm/ package with concrete LLMAdapter implementations:
- OpenRouterAdapter: HTTP via urllib with retry/backoff on 429/5xx
- ClaudeCodeAdapter: subprocess-based Claude CLI with stdin piping
- Factory pattern: create_adapter("openrouter") or create_adapter("claude-code")
- API key resolution chain: constructor > env var > project-root key file
- 42 unit tests, 2 integration tests (gated on API key / CLI availability)

Also adds the infospace-with-history example with Wealth of Nations VSM
analysis pipeline, templates, schemas, source chapters, and processed
output for chapters 1-2. process_chapters.py now supports --provider
and --model flags for automatic LLM-driven processing.

Co-Authored-By: Claude Opus 4.6 <noreply@anthropic.com>
2026-02-11 01:17:58 +01:00

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---
id: book-2-chapter-02
title: "OF MONEY, CONSIDERED AS A PARTICULAR BRANCH OF THE GENERAL STOCK OF THE SOCIETY, OR OF THE EXPENSE OF MAINTAINING THE NATIONAL CAPITAL."
book: "2"
chapter: 2
artifact_type: content
---
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 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 may have borrowed of them; and thus
almost the whole money business of the country is transacted by means of
them. Hence the great trade of those companies.
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 (in consequence of the worn and degraded state into
which the gold coin had fallen a few years ago) was frequently obliged to
purchase gold bullion at the high price of four pounds an ounce, which it
soon after issued in coin at £3:17:10 ½ 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 a-year for
the expense of management. The credit of the new government, established
by the Revolution, we may believe, must have been very low, when it was
obliged to borrow at so high an interest.
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: 10½d. at six per cent. interest, and was at
the same time allowed to take in subscriptions for doubling its capital.
In 1703, therefore, the capital of the bank amounted to £4,402,343; and it
had advanced to government the sum of £3,375,027:17:10½d.
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. 10½d.; and its capital stock amounted only
to £ 8,959,995:14:8d. It was upon this occasion that the sum which the
bank had advanced to the public, and for which it received interest, began
first to exceed its capital stock, or the sum for which it paid a dividend
to the proprietors of bank stock; or, in other words, that the bank began
to have an undivided capital, over and above its divided one. It has
continued to have an undivided capital of the same kind ever since. In
1746, the bank had, upon different occasions, advanced to the public
£11,686,800, and its divided capital had been raised by different calls
and subscriptions to £ 10,780,000. The state of those two sums has
continued to be the same ever since. In pursuance of the 4th of George
III. c.25, the bank agreed to pay to government for the renewal of its
charter £110,000, without interest or re-payment. This sum, therefore did
not increase either of those two other sums.
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.
It were better, perhaps, that no bank notes were issued in any part of the
kingdom for a smaller sum than £5. Paper money would then, probably,
confine itself, in every part of the kingdom, to the circulation between
the different dealers, as much as it does at present in London, where no
bank notes are issued under £10 value; £5 being, in most part of the
kingdom, a sum which, though it will purchase, perhaps, little more than
half the quantity of goods, is as much considered, and is as seldom spent
all at once, as £10 are amidst the profuse expense of London.
Where paper money, it is to be observed, is pretty much confined to the
circulation between dealers and dealers, as at London, there is always
plenty of gold and silver. Where it extends itself to a considerable part
of the circulation between dealers and consumers, as in Scotland, and
still more in North America, it banishes gold and silver almost entirely
from the country; almost all the ordinary transactions of its interior
commerce being thus carried on by paper. The suppression of ten and five
shilling bank notes, somewhat relieved the scarcity of gold and silver in
Scotland; and the suppression of twenty shilling notes will probably
relieve it still more. Those metals are said to have become more abundant
in America, since the suppression of some of their paper currencies. They
are said, likewise, to have been more abundant before the institution of
those currencies.
Though paper money should be pretty much confined to the circulation
between dealers and dealers, yet banks and bankers might still be able to
give nearly the same assistance to the industry and commerce of the
country, as they had done when paper money filled almost the whole
circulation. The ready money which a dealer is obliged to keep by him, for
answering occasional demands, is destined altogether for the circulation
between himself and other dealers of whom he buys goods. He has no
occasion to keep any by him for the circulation between himself and the
consumers, who are his customers, and who bring ready money to him,
instead of taking any from him. Though no paper money, therefore, was
allowed to be issued, but for such sums as would confine it pretty much to
the circulation between dealers and dealers; yet partly by discounting
real bills of exchange, and partly by lending upon cash-accounts, banks
and bankers might still be able to relieve the greater part of those
dealers from the necessity of keeping any considerable part of their stock
by them unemployed, and in ready money, for answering occasional demands.
They might still be able to give the utmost assistance which banks and
bankers can with propriety give to traders of every kind.
To restrain private people, it may be said, from receiving in payment the
promissory notes of a banker for any sum, whether great or small, when
they themselves are willing to receive them; or, to restrain a banker from
issuing such notes, when all his neighbours are willing to accept of them,
is a manifest violation of that natural liberty, which it is the proper
business of law not to infringe, but to support. Such regulations may, no
doubt, be considered as in some respect a violation of natural liberty.
But those exertions of the natural liberty of a few individuals, which
might endanger the security of the whole society, are, and ought to be,
restrained by the laws of all governments; of the most free, as well as or
the most despotical. The obligation of building party walls, in order to
prevent the communication of fire, is a violation of natural liberty,
exactly of the same kind with the regulations of the banking trade which
are here proposed.
A paper money, consisting in bank notes, issued by people of undoubted
credit, payable upon demand, without any condition, and, in fact, always
readily paid as soon as presented, is, in every respect, equal in value to
gold and silver money, since gold and silver money can at anytime be had
for it. Whatever is either bought or sold for such paper, must necessarily
be bought or sold as cheap as it could have been for gold and silver.
The increase of paper money, it has been said, by augmenting the quantity,
and consequently diminishing the value, of the whole currency, necessarily
augments the money price of commodities. But as the quantity of gold and
silver, which is taken from the currency, is always equal to the quantity
of paper which is added to it, paper money does not necessarily increase
the quantity of the whole currency. From the beginning of the last century
to the present time, provisions never were cheaper in Scotland than in
1759, though, from the circulation of ten and five shilling bank notes,
there was then more paper money in the country than at present. The
proportion between the price of provisions in Scotland and that in England
is the same now as before the great multiplication of banking companies in
Scotland. Corn is, upon most occasions, fully as cheap in England as in
France, though there is a great deal of paper money in England, and scarce
any in France. In 1751 and 1752, when Mr Hume published his Political
Discourses, and soon after the great multiplication of paper money in
Scotland, there was a very sensible rise in the price of provisions,
owing, probably, to the badness of the seasons, and not to the
multiplication of paper money.
It would be otherwise, indeed, with a paper money, consisting in
promissory notes, of which the immediate payment depended, in any respect,
either upon the good will of those who issued them, or upon a condition
which the holder of the notes might not always have it in his power to
fulfil, or of which the payment was not exigible till after a certain
number of years, and which, in the mean time, bore no interest. Such a
paper money would, no doubt, fall more or less below the value of gold and
silver, according as the difficulty or uncertainty of obtaining immediate
payment was supposed to be greater or less, or according to the greater or
less distance of time at which payment was exigible.
Some years ago the different banking companies of Scotland were in the
practice of inserting into their bank notes, what they called an optional
clause; by which they promised payment to the bearer, either as soon as
the note should be presented, or, in the option of the directors, six
months after such presentment, together with the legal interest for the
said six months. The directors of some of those banks sometimes took
advantage of this optional clause, and sometimes threatened those who
demanded gold and silver in exchange for a considerable number of their
notes, that they would take advantage of it, unless such demanders would
content themselves with a part of what they demanded. The promissory notes
of those banking companies constituted, at that time, the far greater part
of the currency of Scotland, which this uncertainty of payment necessarily
degraded below value of gold and silver money. During the continuance of
this abuse (which prevailed chiefly in 1762, 1763, and 1764), while the
exchange between London and Carlisle was at par, that between London and
Dumfries would sometimes be four per cent. against Dumfries, though this
town is not thirty miles distant from Carlisle. But at Carlisle, bills
were paid in gold and silver; whereas at Dumfries they were paid in Scotch
bank notes; and the uncertainty of getting these bank notes exchanged for
gold and silver coin, had thus degraded them four per cent. below the
value of that coin. The same act of parliament which suppressed ten and
five shilling bank notes, suppressed likewise this optional clause, and
thereby restored the exchange between England and Scotland to its natural
rate, or to what the course of trade and remittances might happen to make
it.
In the paper currencies of Yorkshire, the payment of so small a sum as 6d.
sometimes depended upon the condition, that the holder of the note should
bring the change of a guinea to the person who issued it; a condition
which the holders of such notes might frequently find it very difficult to
fulfil, and which must have degraded this currency below the value of gold
and silver money. An act of parliament, accordingly, declared all such
clauses unlawful, and suppressed, in the same manner as in Scotland, all
promissory notes, payable to the bearer, under 20s. value.
The paper currencies of North America consisted, not in bank notes payable
to the bearer on demand, but in a government paper, of which the payment
was not exigible till several years after it was issued; and though the
colony governments paid no interest to the holders of this paper, they
declared it to be, and in fact rendered it, a legal tender of payment for
the full value for which it was issued. But allowing the colony security
to be perfectly good, £100, payable fifteen years hence, for example, in a
country where interest is at six per cent., is worth little more than £40
ready money. To oblige a creditor, therefore, to accept of this as full
payment for a debt of £100, actually paid down in ready money, was an act
of such violent injustice, as has scarce, perhaps, been attempted by the
government of any other country which pretended to be free. It bears the
evident marks of having originally been, what the honest and downright
Doctor Douglas assures us it was, a scheme of fraudulent debtors to cheat
their creditors. The government of Pennsylvania, indeed, pretended, upon
their first emission of paper money, in 1722, to render their paper of
equal value with gold and silver, by enacting penalties against all those
who made any difference in the price of their goods when they sold them
for a colony paper, and when they sold them for gold and silver, a
regulation equally tyrannical, but much less, effectual, than that which
it was meant to support. A positive law may render a shilling a legal
tender for a guinea, because it may direct the courts of justice to
discharge the debtor who has made that tender; but no positive law can
oblige a person who sells goods, and who is at liberty to sell or not to
sell as he pleases, to accept of a shilling as equivalent to a guinea in
the price of them. Notwithstanding any regulation of this kind, it
appeared, by the course of exchange with Great Britain, that £100 sterling
was occasionally considered as equivalent, in some of the colonies, to
£130, and in others to so great a sum as £1100 currency; this difference
in the value arising from the difference in the quantity of paper emitted
in the different colonies, and in the distance and probability of the term
of its final discharge and redemption.
No law, therefore, could be more equitable than the act of parliament, so
unjustly complained of in the colonies, which declared, that no paper
currency to be emitted there in time coming, should be a legal tender of
payment.
Pennsylvania was always more moderate in its emissions of paper money than
any other of our colonies. Its paper currency, accordingly, is said never
to have sunk below the value of the gold and silver which was current in
the colony before the first emission of its paper money. Before that
emission, the colony had raised the denomination of its coin, and had, by
act of assembly, ordered 5s. sterling to pass in the colonies for 6s:3d.,
and afterwards for 6s:8d. A pound, colony currency, therefore, even when
that currency was gold and silver, was more than thirty per cent. below
the value of £1 sterling; and when that currency was turned into paper, it
was seldom much more than thirty per cent. below that value. The pretence
for raising the denomination of the coin was to prevent the exportation of
gold and silver, by making equal quantities of those metals pass for
greater sums in the colony than they did in the mother country. It was
found, however, that the price of all goods from the mother country rose
exactly in proportion as they raised the denomination of their coin, so
that their gold and silver were exported as fast as ever.
The paper of each colony being received in the payment of the provincial
taxes, for the full value for which it had been issued, it necessarily
derived from this use some additional value, over and above what it would
have had, from the real or supposed distance of the term of its final
discharge and redemption. This additional value was greater or less,
according as the quantity of paper issued was more or less above what
could be employed in the payment of the taxes of the particular colony
which issued it. It was in all the colonies very much above what could be
employed in this manner.
A prince, who should enact that a certain proportion of his taxes should
be paid in a paper money of a certain kind, might thereby give a certain
value to this paper money, even though the term of its final discharge and
redemption should depend altogether upon the will of the prince. If the
bank which issued this paper was careful to keep the quantity of it always
somewhat below what could easily be employed in this manner, the demand
for it might be such as to make it even bear a premium, or sell for
somewhat more in the market than the quantity of gold or silver currency
for which it was issued. Some people account in this manner for what is
called the agio of the bank of Amsterdam, or for the superiority of bank
money over current money, though this bank money, as they pretend, cannot
be taken out of the bank at the will of the owner. The greater part of
foreign bills of exchange must be paid in bank money, that is, by a
transfer in the books of the bank; and the directors of the bank, they
allege, are careful to keep the whole quantity of bank money always below
what this use occasions a demand for. It is upon this account, they say,
the bank money sells for a premium, or bears an agio of four or five per
cent. above the same nominal sum of the gold and silver currency of the
country. This account of the bank of Amsterdam, however, it will appear
hereafter, is in a great measure chimerical.
A paper currency which falls below the value of gold and silver coin, does
not thereby sink the value of those metals, or occasion equal quantities
of them to exchange for a smaller quantity of goods of any other kind. The
proportion between the value of gold and silver and that of goods of any
other kind, depends in all cases, not upon the nature and quantity of any
particular paper money, which may be current in any particular country,
but upon the richness or poverty of the mines, which happen at any
particular time to supply the great market of the commercial world with
those metals. It depends upon the proportion between the quantity of
labour which is necessary in order to bring a certain quantity of gold and
silver to market, and that which is necessary in order to bring thither a
certain quantity of any other sort of goods.
If bankers are restrained from issuing any circulating bank notes, or
notes payable to the bearer, for less than a certain sum; and if they are
subjected to the obligation of an immediate and unconditional payment of
such bank notes as soon as presented, their trade may, with safety to the
public, be rendered in all other respects perfectly free. The late
multiplication of banking companies in both parts of the united kingdom,
an event by which many people have been much alarmed, instead of
diminishing, increases the security of the public. It obliges all of them
to be more circumspect in their conduct, and, by not extending their
currency beyond its due proportion to their cash, to guard themselves
against those malicious runs, which the rivalship of so many competitors
is always ready to bring upon them. It restrains the circulation of each
particular company within a narrower circle, and reduces their circulating
notes to a smaller number. By dividing the whole circulation into a
greater number of parts, the failure of any one company, an accident
which, in the course of things, must sometimes happen, becomes of less
consequence to the public. This free competition, too, obliges all bankers
to be more liberal in their dealings with their customers, lest their
rivals should carry them away. In general, if any branch of trade, or any
division of labour, be advantageous to the public, the freer and more
general the competition, it will always be the more so.
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